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Home >Markets >Mark To Market >Metal investors face a dull March quarter as covid-19 spoils the revival

The little recovery that metal companies were beginning to show in the early part of the fourth quarter (Q4) was all undone at the fag-end of FY20. The covid-19-led lockdown in India and some parts of the globe dragged volume growth down sharply at a time when construction-led demand tends to pick up. With volumes expected to shrink across the metal universe, investors in metal companies may have to contend with negative surprises as well.

In fact, metal volumes are expected to shrink across the board, but steel companies might be marginally less impacted than other non-ferrous metal companies. That’s because, while steel volumes were lower, prices had remained firm during Q4.

Losing sheen.
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Losing sheen.

Average steel prices in the domestic market were marginally higher over Q3 both in the long and flat segments. Hence, some of the companies may even be able to show improved realizations. Tata Steel Ltd’s European operations may show an increase in losses due to the escalation of the pandemic in the region.

“Q4 is also traditionally a strong time for steel companies, and we saw a similar trend this quarter right up to February. However, steel prices started correcting from the 2nd week of March and, by 23rd, demand had almost dried up (barring exports and pending govt supplies) after the imposition of the country-wide lockdown," said analysts at Emkay Global Financial Services Ltd.

JSW Steel Ltd’s overseas operations could also hit its profitability. However, debt levels of steel companies have been increasing and debt reduction plans will be key in the coming quarters. Nevertheless, earnings before interest, tax, depreciation and amortization for steel firms may post a big disappointment.

Mining companies have also seen demand shrink in Q4, while supply was restricted. But steady iron ore prices may aid margins for them.

Non-ferrous firms have seen an even bigger drop in volumes in aluminium, copper and zinc, which ranges from 13-35%, and hence, face a bigger dent on operating leverage. Aluminium volumes have been low due to the slowing demand, particularly from autos and construction, while prices were soft during the quarter. Companies have focused on cost control, but that is not likely to help much.

“With a sharp fall in most commodities partly offset by muted costs, we expect earnings for non-ferrous companies to decline in 4QFY20," said analysts at Kotak Institutional Equities.

The Nifty Metal index, which is down 35.2% year to date, does not have any positives going in its favour. Slowing demand in the first half due to tepid construction activity, which eases during the monsoon, can push back revival until late in the second half. Besides, the increase in inventory at the factory and distribution levels may take time to clear.

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