The BSE Metal Index is down this year, while the broader market is up. Over a year ago, it’s still up by a fifth. That’s a sign that investor enthusiasm for the sector has cooled a bit. Some of that could be due to cooling of prices, concerns on cost inflation and the appetite for acquisition of distressed assets that could see debt levels of acquirers increase.
On the steel side, companies did see realisations improve sequentially, which contributed to improved profitability. This is despite some increase seen in costs, due to higher prices of coking coal. In Tata Steel’s case, its steel sales volumes suffered due to an outage at its blast furnace in Odisha. Production is back to normal now. Tata Steel’s Ebitda rose by 13.4% sequentially while that of JSW Steel Ltd rose by 37.4%.
While their results may have been good, the quarter saw companies move ahead in their quest to acquire distressed steel assets. This will see them make capital outlays for the acquisitions once the legal hurdles in their paths are cleared. Keen bidding for these assets has also meant companies have probably paid more than what they normally would. In addition, companies are also making plans for capital investments so that in the next 3-4 years they have added to their capacity, to cater to the forecasted increase in demand. All this will also place demands on their balance sheets.
In the non-ferrous space, the situation is slightly different. Firstly, the price increases have cooled in this quarter. For instance, copper prices declined by 7% in the March quarter sequentially, while that of zinc fell by 1.6% and that of aluminium by 11.9%. Zinc prices declined due to an improving supply situation while aluminium was felled by the US threat of import tariffs.
Volatility in aluminium prices continued, with the US imposing sanctions on Rusal United Company, which initially saw prices increase, and then when it appeared that the US may relax its stand, they fell again. Still, aluminium prices are up by 16.8% over their early April-levels. Zinc prices continued to decline however, down by 5.9%.
In the current quarter, international developments with respect to price and trade-related disruptions will continue to affect the performance of companies. Also, the impact of the acquisition of distressed steel assets will be visible in the consolidated financials of their acquirers. This will give a clearer picture to investors on the near term impact.