Ray of hope for steel, aluminium firms

The average price of hot rolled coil (HRC) in March stands at  ₹60,700 per tonne, up by 12.5% from December.
The average price of hot rolled coil (HRC) in March stands at 60,700 per tonne, up by 12.5% from December.

Summary

There is hope that the reopening of the key metals market, China, post the covid-induced lockdowns would boost demand for the two commodities.

Steel and aluminium producers continue to be plagued by subdued demand conditions that have resulted in lower price realizations. Even so, there is hope that the reopening of the key metals market, China, post the covid-induced lockdowns would boost demand for the two commodities. Some initial signs are encouraging. For instance, in February, China’s manufacturing Purchasing Managers’ Index (PMI) touched a 11-year high of 52.6. Further, the woes in the real estate sector appear to be bottoming out.

In this backdrop, China’s export hot rolled coil (HRC) steel price, a good indicator of global prices, has risen by 14% in 2023 so far, rebounding from a 23% decline last year. The Indian domestic markets reflect the same trend. The average price of HRC in March stands at 60,700 per tonne, up by 12.5% from December. In 2022, prices had fallen by 17.5%. Further, the average price of aluminium on the London Metal Exchange in the March quarter so far is about 5% higher sequentially on the hopes of improved demand from China.

That said, it may be too early to rejoice. “We need to see consistency in the recovery of the Chinese economy. It is early to interpret from the PMI reading that a meaningful rebound has taken place," said Satyadeep Jain, analyst at Ambit Capital.

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As things stand, the current price of aluminium is nearly 43% lower than its multi-year high of $3984.50 per tonne seen in March 2022. Recall that aluminium prices had shot up in the early part of 2022 on the back of concerns over supply disruptions due to the Russia-Ukraine war.

To be sure, China’s gross domestic product growth target of 5% for 2023 is lower than expectations. Therefore, how growth pans out needs closer tracking. Besides, muted demand in rest of the world is also a pain point.

Meanwhile, in the past year, Tata Steel’s shares are down by about 17% as weak performance of its European business weighed on investor sentiment. The company’s European operation was in the red in the December quarter. Steel price realization in Europe is expected to drop sequentially this quarter.

On the other hand, shares of Jindal Steel & Power Ltd have gained 23% in the last one year. Lower debt levels and comparatively better earnings performance given less foreign exposure have helped sentiments. For steel makers, the rising cost of coking coal (a raw material) needs to be watched out for, as it would weigh on margins.

For aluminium, some tailwinds are foreseen in the latter half of 2023. “While demand is unlikely to return in force before the second half of the year, markets will be vulnerable when it does as curtailment in capacities and sanction on Russian metal will likely result in supply chain disruption aiding aluminium realizations," said a report by JM Financial Institutional Securities dated 9 March. In 2022, smelter curtailments rose across Europe due to the energy crisis.

However, falling thermal coal price is a silver lining as it aids aluminium spreads and Hindalco Industries Ltd’s Indian operations benefit from this.

This along with a better outlook in its overseas business, Novelis Inc., would aid sentiments of investors in Hindalco stock, which is— down by almost 32% in the past one year.

Overall, the ongoing quarter is a seasonally strong one. But eventually, a pick-up in global demand is crucial for volumes and realizations to rally.

Jefferies global commodities team believes a meaningful cyclical recovery in China looks increasingly likely this year. However, if that doesn’t play out, this year would be another muted one for metal companies.

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