Declining metal prices a risk for Indian producers2 min read . Updated: 28 Nov 2018, 08:44 AM IST
Concerns on global economic growth appear to be affecting commodity prices as overhangs, such as the US-China trade war, are not really going away
When metal prices fall, producers are hit the most. They earn less for every tonne of metal sold, and that feeds into lower profitability and cash flows.
Some Indian producers have acquired distressed steel assets at relatively high valuations due to stiff competition from rivals. While these were ostensibly done with an eye on the long run, the short term may bring some grief if steel prices continue to decline. These assets looked attractive at the steel prices that were prevailing then. With falling steel prices, the price paid for those acquisitions could pinch.
In China, iron ore futures are at a four-month low and the steel sector entered a bear market this week as rebar prices fell by more than a fifth from the year’s peak, according to Reuters. Weakness in Chinese flat steel prices could see domestic flat steel prices decline by ₹ 3,000-4,000/tonne in the next few months, according to a Motilal Oswal research report.
Since early April, the Bloomberg Industrial Metals Sub-index is down by 12.1%. Prices of non-ferrous metals such as copper, zinc and aluminium have been falling. Zinc is down 22.5% since early April, while copper is down by 8% and aluminium by 1%. While aluminium seems an outlier, that’s partly due to situations unique to the metal, such as the impact of US sanctions on United Company Rusal Plc. Even aluminium prices are off their highs of FY19.
Concerns on global economic growth appear to be affecting commodity prices as overhangs, such as the trade war between the US and China, are not really going away. China’s economy is showing signs of a slowdown and weakness in demand in the global automotive market is also a red flag for steel demand. Whether these concerns are overdone or not may determine if commodity prices bounce back in 2019 or stay down. The winter months anyway see lower activity, so a clearer picture could emerge by early FY20.
While these ups and downs play out, falling realizations are a dampener for metal producers. This is made worse by the rupee regaining ground against the US dollar. Sure, falling energy prices should see their costs decline but that may not be good enough. Their margins in the coming quarters are likely to get trimmed.
Shares of non-ferrous producers such as Hindalco Industries Ltd, Vedanta Ltd and National Aluminium Co. Ltd have fallen since early November. While shares of steel producers have fallen too, investors in these companies have another worry to contend with—integration of steel plants acquired at rich valuations.
While it’s early days yet, this is clearly a risk to watch out for.