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Base metals resume bull ride

Ujjval Jauhari / 07 Dec 16 | 07:50 AM

With the worst behind, and prices of zinc, aluminium, and other base metals rebounding from 2016 lows, manufacturers are benefiting. Importantly, analysts see further increase in zinc and iron ore prices, and expect aluminium prices to remain firm. This should lead to further benefits for companies like Hindustan Zinc, Vedanta, and NMDC. Base metals are widely used in commercial and industrial applications. They are more abundant in nature and therefore far cheaper than precious metals such as gold, silver, and platinum.

Zinc has been one of the best-performing base metals, with prices on the London Metal Exchange (LME) almost doubling since its low in January. This has led to Hindustan Zinc more than doubling its share price from low of Rs 135.8 in January to Rs 287 in November end; the stock closed at Rs 276 on Tuesday on BSE.

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Iron ore prices have rallied a lot, too. This reflects in NMDC's share price, which more than doubled from low of Rs 75.2 in February to Rs 142.5 in November, before cooling a bit to Rs 124 levels now.

With India's key zinc producer, Hindustan Zinc, benefiting, and iron ore prices rebounding, benefits were guaranteed for Vedanta, which has a majority stake in Hindustan Zinc and owns iron ore mines. With the rally in other base metals, and the proposed merger with Cairn India likely soon, Vedanta's stock price has grown more than four-fold since the start of 2016.

There could be more gains for these stocks. Despite rally, experts see steam left in zinc and aluminium prices. 

Analysts at Edelweiss offer an upbeat outlook for zinc and aluminium, encouraged by their limited supplies. Globally, zinc's mined production in 2016 is down 11 per cent from last year to 7.95 million tonnes. Zinc inventory at Shanghai Futures Exchange and LME is down to seven-year low of 603,000 tonnes. China's mined aluminium production in 2016 is down two per cent from last year, resulting in lower exports. This has helped maintain supply-demand balance in the rest of the world. Inventory continues to remain at multi-year lows at LME and Shanghai Futures Exchange; this would further support aluminium prices. Analysts had remained sceptical of rising aluminium prices, but they seem confident now. Elara Research says, "We believe aluminium prices may sustain at close to $1,700 per tonne as incremental supply is lower than initial estimates."

Elevated prices will reflect positively in the financials of these companies, which recently reported good performance. Hindustan Zinc, for instance, has seen its operating profit increase 84 per cent in September quarter over the previous one; with firm zinc prices and improving mined production in second half of FY17, the company is likely to see further gains. 

Led by a good show at Hindustan Zinc, Vedanta will also benefit from better aluminium and iron ore prices. With Cairn-Vedanta merger not far, the company's debt levels should also come down. All these should add legs to the Vedanta stock rally. 

Landed iron ore prices have moved up 22 per cent month over month in November to $72 per tonne on higher demand. Thus, NMDC, which had effected a 20 per cent price hike in October for iron ore fines and lumps, has again increased fines prices by Rs 100 per tonne in December. These are still 25 per cent lower than landed prices of iron ore in the country; hence, should lend downside support. Although most of NMDC's produce is sold in India, the company will also benefit from improving international prices as it exports some of its low-iron-content output. Apart from improving realisations, NMDC is also seeing an increase in volumes. All these have boosted its profit in the past few quarters. 

Analysts say NMDC can be considered in the iron sector, and Vedanta and Hindustan Zinc in the non-iron one; even Hindalco can be bought on stock fall. These companies are also working on cutting costs, which could boost profits further.

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