A drop in Hindustan Zinc Ltd’s selling prices of zinc and lead should surprise no one, as they mirror global price trends. The news that it had cut prices by about 1% led to its share falling by about 2% on Thursday, before recovering to close flat.
Zinc and lead prices fell from their highs in mid-February, but March has seen them diverge. Zinc prices are down by about 8%, but lead prices have recovered and are now at the same level.
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In 2010, zinc usage rose by about 16% after falling in the previous year, shows data from the International Lead and Zinc Study Group (ILZSG). But production also rose by about 14%. There has been a steady increase in the London Metal Exchange’s (LME) opening stocks, indicating an inventory build-up.
Though lead inventories are also up since the beginning of 2011, the quantum of increase is lower. Lead production and usage are more evenly matched, and between October and January, metal production exceeded usage by just 3%, according to ILZSG figures.
In 2011, non-ferrous metals firm Xstrata Plc expects demand for zinc to grow, and the current surplus situation to end in the next two years. Lead, too, is expected to be in surplus in 2011, but by a modest level, and then enter a deficit state. Demand from China will play a key role in influencing demand for both commodities.
Hindustan Zinc’s performance will depend not only on price realizations, but also on volume growth due to its expansion projects. Its zinc production volumes were higher in the December quarter, and this will be visible in the March quarter as well. Lead volumes, too, are expected to rise in fiscal 2012, after the commissioning of a smelter in the March quarter.
Meanwhile, average LME prices of zinc rose 3% sequentially during the March quarter, while lead prices are up by 9%.
Silver will increasingly become an important part of the company’s revenue mix, as production is expected to triple in fiscal 2012 after a capacity expansion at one of its silver-rich mines. That will see silver contribute to a significant portion of revenue and profits.
Thus, revenue growth can be expected to increase. But in the December quarter, costs increased as well due to higher operational expenses and rising depreciation due to its new projects.
This is likely to be visible for some more time, till capacity utilization ramps up over a period of time. Once that happens, volume growth will play an equally important role in Hindustan Zinc’s performance, and not just product prices.
Graphic by Paras Jain/Mint
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