Metals: price boost
Rising prices have been supporting the performance of metal companies and this was visible in the September quarter
Rising prices have been supporting the performance of metal companies and this was visible in the September quarter as well.
A few companies reported that they faced higher-than-expected input costs due to higher coal and energy costs.
On the demand front, firms are hoping that private sector investment takes off, so that domestic demand for metals picks up. While the automotive sector is showing a revival, sectors such as housing, construction, and infrastructure are experiencing slow growth.
However, globally metal prices have been recovering on the back of improving economic prospects in developed markets and helped by China’s focus on cutting down on polluting metal plants.
This has led to a favourable demand-supply situation from the producers’ point of view. Chinese hot rolled coil prices as of end-September gained 11% from the start of the quarter.
On the non-ferrous side, in this same period, copper gained by 9%, zinc by 14% and aluminium by 8%.
Considering how zinc prices have done, it was not surprising to see Hindustan Zinc Ltd post a 26.8% sequential increase in its earnings before interest, tax, depreciation and amortization (Ebitda), an indicator of operating profitability, in the quarter. But the pressure on margins was visible, even if slightly. Vedanta Ltd saw margins slip by 40 basis points (bps) sequentially, even as Ebitda itself rose 16.4%, due to input cost pressures. One basis point is 0.01 percentage point. Tata Steel Ltd saw a quarter when its India business sparked, but Europe pulled it down, as lower prices affected profitability. Imports to Europe seem to have hit realizations. In India, Tata Steel saw its Ebitda per tonne improve.
While iron ore prices have slipped of late, non-ferrous metal prices continue to hold on to their gains. Seasonally, this is a weak period in key markets due to winter and holidays. While price movements in this period can be a bit volatile, a sustained decline is negative for metal producers. In the medium term, the key factor to watch would be how domestic demand for metals is shaping up.