Metals: Is the worst over?
As the world switched out of the “risk-on" mode earlier this year, commodity experts started forecasting the end of a super-cycle for commodities. China’s slowing growth has only strengthened this prophecy, as it is the largest consumer of most commodities, except crude oil. This is reflected in the kind of fall that some of the metals have seen since March 2012. Aluminium is down 18 per cent to $1927 a tonne and copper 13 per cent to $7,481 a tonne, since March. Though globally prices of ferrous and non-ferrous metals have substantially come off, analysts are not willing to call this the bottom.
The near-term trend also remains weak, going by the prices of metals over the last fortnight. Emkay Global, which has analysed the movement in metal prices for the fortnight ended June 15, says: “Global steel prices slipped further during the last fortnight on the back of bleak demand and still higher output." In the same period, base metals remained volatile while aluminium continued to soften.
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Undoubtedly, global factors are a big overhang for prices, it’s a mixed bag for metal companies in India. Though metals prices are coming down globally, the financial performance of Indian companies may not get hit significantly this quarter due to the rupee’s fall. However, this does not take away the structural downtrend for metals.
Most analysts are negative on the entire sector and the picks, if any, are mostly defensive in nature. This is because Indian companies are faced with the issue of over-capacity and relatively slowing demand in local markets, too. Analysts, for instance, see demand for long steel products weakening due to monsoon.
Apart from falling global prices, Giriraj Daga of Nirmal Bang expects prices of flat products to come down in the domestic market as the expected capacity addition is huge. Between September 2011 and September 2013, steel producers will add 10 million tonne of capacity to the existing base of 35 million tonne. Even the most optimistic demand projection does not go beyond the 40-million-tonne mark. This will hurt realisations. Apart from over-capacity, Indian producers are also faced with rising costs, which is ewroding their competitiveness compared to others in the region.
Rising costs are not only hurting steel producers, but also aluminium producers, thanks to a steady increase in prices of coal and power. Producers of this non-ferrous metal are hit by a double whammy of falling prices and rising costs. While globally producers have announced production cuts, they are not meaningful enough to arrest falling prices. ICICI Securities believes that India has lost its cost advantage over the last year and a half, and Indian players like Hindalco and Nalco do not feature in the lowest cost decile any longer. Till LME prices revert to $2400 a tonne, aluminium producers will remain under stress.