Metals: Waiting for domestic consumption to pick up speed
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Metal shares paused for breath in the December quarter, rising by 1.1%, coming on the back of a 14% increase in the September quarter. That pause did not hurt the sector apparently, as it gained over 15% in this quarter so far. A large part of that pause can be attributed to demonetisation, which had pulled down the broader market as well.
Demonetisation was expected to have an adverse effect on the demand for metals, especially steel, due to fears that automobiles and real estate will get affected. While real estate has indeed been affected, automobiles recovered rather quickly, except for two-wheelers. Sales did not get badly affected, either.
In some cases, there were reports that dealers had stocked up on inventory using old currency during the initial days, while in steel, an expectation that prices will be increased led to higher purchases. When companies announced results, the effects of demonetisation were hardly seen. Output was higher for most firms, especially as they were producing more metal from expanded or new capacity. Although domestic demand was subdued, exports have proved to be a viable option. Rising metal prices have helped. Overall, the metals sector saw sales increase by 12.9%, while operating profit increased by 19.6%.
Price realizations have played a supportive role. Steel prices have been trending up, supported by rising iron ore prices and coking coal prices, too. The current quarter has seen that continue but iron-ore prices have come off their highs. Non-ferrous metals continue to do well. There is some concern that the treatment and refining charges earned by copper firms may see some pressure in 2017.
Overall, the outlook for metal firms continues to look good. One weak link is that private sector capital investment is not picking up smartly. Along with a weakness in the real estate sector, that does not augur well for domestic metal demand. However, global trends are looking up, which augurs well for exports and prices. External risks include a setback to China’s plans to regulate output and if the US Federal Reserve hikes rates by more than expected.