Metals: Buoyed by rising prices
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The good run continued for Indian metal firms in the September quarter as rising output, firm price trends and measures to protect domestic steel-makers from imports saw their performance improve.
That saw the BSE Metal index end the September quarter with a 14% gain from the start; it has since then gained another 4%.
Demonetisation and its impact on the economy, especially on the real estate sector and as a result on demand for metals, has investors worried.
Aggregate data for top metal producing firms show sales rose 7% sequentially, while operating profit rose 43%. This is despite a 14.6% increase in raw material costs. Where firms managed to rein in expenses were on staff, energy and other costs. But better price realizations were what stood out.
On the non-ferrous front, zinc led the way with a 10.5% gain over the preceding quarter, coming on the back of a 12.8% gain in the June quarter. Aluminium held on to the gains of 7.9% made in the June quarter. Copper prices stayed soft, however, although its fortunes have turned in the current quarter.
On the ferrous side, rising prices of iron ore and coking coal have lent support to steel realizations, too. Steel firms benefited from the minimum import price as imports declined. Even then, as new capacity has begun to ramp up, steel firms had to export to sell surplus output. Domestic demand is better but is still relatively low.
In the current quarter, the good news on the realization front continues, although the extent varies depending on the metal.
The big question mark in the next few quarters is the impact demonetisation will have.
Global metal prices were on fire in November, a welcome distraction that may explain why the metal index is only marginally lower compared with its pre-demonetisation levels.
If metal prices continue to increase, producers can probably withstand the short-term adverse effects.
If demonetisation’s effects last for over a year, the sector may feel the pressure from slowing demand. Any shocks to the Chinese economy are another major risk for metal prices.