
Base metal miners likely to outshine steel companies in mixed Q3; JSPL, Hindalco emerge as top picks
Summary
JSPL and Hindalco are favoured among domestic metal firms as they navigate global price volatility in FY25. While JSPL performs well with long steel products, Hindalco faces headwinds from declining aluminium prices, though it remains a strong long-term investment option.Domestic metal and mining companies with strong volume track records, superior product mixes and near-term expansion plans are expected to hold fort against swings in global prices and geopolitical uncertainties in the remainder of FY25, experts said ahead of the December quarter earnings season (Q3FY25).
Jindal Steel and Power Ltd (JSPL) and aluminium manufacturer Hindalco Industries Ltd have emerged as the top picks in the ferrous and non-ferrous metal categories, respectively.
JSPL has outperformed the broader metals pack over the past one year, returning almost 25%, while the Nifty Metal index returned 5% during the same period. Hindalco’s share price has dropped almost 26% from an all-time high of ₹772.65 in October 2024 due to falling aluminium prices and short-term demand pains.
“From a long-term volume growth perspective, Hindalco has better structural drivers in place compared to Nalco (National Aluminium Co Ltd). Moreover, Hindalco’s recent stock correction offers a good entry point into the stock as well," Tushar Chaudhari, lead analyst at PL Capital, told Mint.
Ferrous fizzling out?
While global demand for base metals such as aluminium, zinc and copper remains robust relative to that of ferrous metals like steel, a pickup in domestic construction and infrastructure activities following the monsoon is likely to bode well for steel manufacturers in H2FY25. ICICI Securities expects improving domestic consumption growth in Q4 to support falling steel prices, provided imports remain low.
India turned a net importer of steel in FY24, falling prey to cheap Chinese imports of hot rolled coil steel. However, experts said there will be little respite from imports as China’s own demand remains weak and the Indian government is unlikely to impose any safeguard duty on steel imports to keep domestic inflation in check.
“A weakness in Chinese demand, despite economic stimulus measures, has led to lower global steel prices, putting pressure on steel spreads (profitability of producing steel)," Aditya Welekar, senior metals and mining analyst at Axis Securities, told Mint. “Lower steel spreads and falling steel exports from India due to intense competition from China will put pressure on the profitability of Indian steel mills in the near term."
Only companies with more exposure to long steel products like bars, rods and steel structural items are likely to improve their profitability in Q3 as these products traded at a 12% premium over their flat steel counterparts throughout the quarter, according to Axis Securities.
Long steel prices rose ₹600-700 per tonne sequentially on strong demand from construction and infrastructure activities. Flat steel prices fell ₹2,400–2,500 per tonne during the period due to weak domestic automobile demand, continued dumping of cheap flat steel from China and subdued exports.
Hence, Elara Securities expects the blended realisation of major steel companies to dip at most ₹4,700 per tonne sequentially, despite an improvement in sales volume for most players in Q3. The brokerage expects only JSPL, which has over 50% exposure to long steel, to post a sequential improvement in its Ebitda/tonne metric, indicating better prospects for long steel players ahead. Ebitda is earnings before interest, taxes, depreciation and amortisation.
Non-ferrous holds strong
Meanwhile, global demand for aluminium, copper and zinc outstripped supply, contributing to their elevated prices in the December quarter. Demand for renewable energy sources, electric vehicles and battery technology increased mining activity of these base metals in recent years.
However, refinery shutdowns at Rio Tinto, a global mining and refining corporation, along with constrained supply of bauxite (the mineral required to produce aluminium) from major producer Guinea led spot alumina prices to peak at $810/tonne in December.
Since alumina prices shot up 38% and aluminium prices rose 8% on-quarter, upstream companies Hindalco and Nalco are expected to post solid revenue and margin growth in Q3, even though sales volume would remain flat on a sequential basis.
While Nalco’s Ebitda margin is expected to reach a four-quarter high of 38-40% in Q3, Hindalco’s consolidated profitability is expected to be dampened by short-term pains at its downstream subsidiary Novelis. A global leader in aluminium rolled products and can recycling, Novelis is expected to post a 21% sequential fall in its Q3 Ebitda due to rising global scrap costs, which hurt its profitability.
Emkay Global said Novelis’s pain would persist for two or three quarters at least. With rising Chinese scrap demand and a slowdown in demand from the auto and speciality segments, the brokerage expects no material pickup in the company’s earnings growth in Q4.
However, “we remain constructive on Hindalco because it has better volume growth prospects than Nalco, which is a pure play on aluminium prices," Chaudhari of PL Capital said. “With supply constraints easing, alumina and aluminium prices are coming down. Hence Q4 might not be as exciting for Nalco and we could see further moderation in its stock price."
Hindustan Zinc Ltd and Vedanta Ltd are also expected to benefit from elevated zinc prices and volumes in Q3. Ongoing supply constraints and fear of fresh tariffs from the US on base metal imports have led to a spike in zinc and copper prices recently. While global inventories of copper and zinc have fallen in January, aluminium inventories remain relatively high.
Kotak Securities expects copper and aluminium prices to remain range-bound till March as metal trading is expected to remain choppy till then. While traders will wait for more clarity on the incoming Trump administration’s new trade policies, the brokerage expects downward pressure on aluminium prices due to easing supply constraints.
Meanwhile, it estimates zinc prices may stay supported at higher levels due to ongoing supply issues and lower stocks at Shanghai Futures Exchange warehouses.
“If Trump announces hefty import tariffs on metals, then we expect a price rally. However, prices will only sustain at higher levels if China introduces a stimulus bold enough to offset the impact of potential US tariffs and stabilise their domestic consumption," Kaynat Chainwala, associate vice president of commodity research at Kotak Securities, told Mint. “Till then, a risk-off sentiment with Trump's arrival and a strong dollar is expected to keep any price gains in check."