Federal budget proposals on Monday to boost infrastructure spending by 15% and take electricity to every household by 2018 have spurred a rally in local producers on optimism the outlay will drive domestic consumption. Vedanta Ltd, the nation’s biggest producer of base metals, predicts aluminum sales growth to rebound to 9% in the year starting 1 April, and copper to 5%.
Prime Minister Narendra Modi plans to spend as much as ₹ 3 trillion on roads, ports, power plants and other public projects in the year starting 1 April, according to budget documents. Aluminum and copper are mainly used in the power sector in the country, with transport, consumer durables and construction accounting for the rest.
“This is exactly following the story of the Chinese economy," Abhijit Pati, chief executive officer (CEO) of Vedanta’s aluminum unit, said from Odisha. “For the last three decades, China has phenomenally developed its infrastructure. The moment you develop infrastructure, you also grow the metal applications."
Shares of billionaire Kumar Mangalam Birla’s Hindalco Industries Ltd, the nation’s second-largest aluminum producer, have jumped 9% since the budget. Billionaire Anil Agarwal’s Vedanta, which had its worst year on record in 2015, has surged 11% since Monday.
“Shares have been rallying because commodity prices have been inching up and because of the infrastructure push in the budget," said Ashish Kejriwal, a Mumbai-based analyst at Elara Securities (India) Pvt. “All of these companies are leveraged play and any marginal improvement in Ebidta will increase their earnings significantly."
A slowdown in China’s economy has led to a surge in supplies of metals from aluminum to zinc, pushing prices down to six-year lows in the past year. The glut has triggered a rise in trade tensions from the US to Asia. India increased the import tax on aluminum in the budget to 7.5% from 5%, providing some relief to domestic producers.
The downturn in commodities eroded Birla’s networth last year by $991 million. His wealth now stands at $5.1 billion. Shares of Vedanta gained 4.3% on Wednesday, Hindalco jumped 6.7%. Aluminum prices in London climbed 0.5% to $1,581 a tonne and copper rose 1.5% to $4,787.50.
While the London Metal Exchange Index has advanced 2.4% this year, gains are not expected to last. Copper and aluminum prices may fall more than 10% by year’s end amid the weakness in Chinese demand that’s unlikely to show any recovery in 2016, Goldman Sachs Group Inc said on 8 February. The bank lowered its 12-month outlook for copper on the London Metal Exchange to $4,000 a tonne from $4,500 a tonne and cut its aluminum forecast to $1,350 from $1,550.
Vedanta’s aluminum sales may grow 9% in the 12 months starting 1 April, compared with almost zero growth this year, Pati said. Copper may grow 5% next year from 400,000 tonnes, P. Ramnath, chief executive officer (CEO) of Vedanta’s copper division, said.
The two metals accounted for about 50% of the company’s revenue last year in its basket of commodities, which also include zinc, oil and gas.
“Electrification and new lines contain a lot of copper, so that will definitely boost demand," Ramnath said in an interview from Chennai. “Spending on infrastructure will have an indirect spinoff for the metals sector."
Some analysts aren’t as optimistic about the government’s plans.
“These are just long-term stories. The pace of execution that is promised in the budget is never achieved," said Rahul Dholam, an analyst at Angel Broking Ltd in Mumbai. “These are things you can take with a pinch of salt."
Steel makers may also benefit as Modi targets 10,000 kilometers of national highways in the financial year and upgrading 50,000 kilometers of state highways. India’s steel consumption is poised to accelerate as the country invests in rural infrastructure and manufacturing growth jumps to as much as 12% in coming years from the current rate of 8%, according to Yi Zhu, an analyst with Bloomberg Intelligence.
Steel producers should benefit from higher demand as India plans to spend ₹ 1.21 trillion on railways compared to an average of ₹ 48,100 crore over 2009-14, she said. Shares of Tata Steel Ltd have jumped 7.4% since Monday to a two-month high. JSW Steel Ltd advanced 0.6%. Bloomberg