 "Indian metal companies may lose cost advantage")
Metal stocks were the top losers on Tuesday as the benchmark BSE Sensex shed 855 points. The BSE Metal Index has declined 22 per cent over six months, while the Sensex has risen four per cent. Weak demand and overcapacity globally continue to be an overhang for the sector.
The recent guidelines on coal mine auction have also come as a dampener for domestic producers. According to the guidelines, non-regulated sectors like metals might now have to pay international prices for coal. This would impact the return ratios of these companies, which have so far been higher than global counterparts, thanks to cheaper raw material.
The guidelines seek to differentiate regulated from unregulated sectors. While the government wants to prevent cost escalation in a regulated sector like power, unregulated sectors like metals, cement and captive power producers will have to cough up international prices for coal. The reserve price for these sectors will be linked to international prices and the highest bidder will get the mines.
Analysts believe with raw material prices inching close to international levels, the return ratios of Indian metal companies will decline. Higher coal costs will negatively impact the margins of these companies. Ambit Capital expects the return on capital employed (RoCEs) of these companies to be similar to global peers (high single digits).
Also, the Street expects the larger coal blocks to be diverted to power producers. Of the 74 blocks, 32 were previously held by steel, cement or aluminium producers. A majority of these are smaller blocks, designated for sponge iron.
Ambit Capital claims experts feel the larger blocks previously given to steel, cement, sponge iron or aluminium players could be re-directed to power, as this regulated sector remains top of the priority list. Analysts believe Hindalco could be a top loser and its new projects might not get an ROCE of more than five-seven per cent.
Also, competitive intensity is expected to remain strong, given the tight availability of mines and the clamour for these by metal producers. Analysts claim six large blocks spread over Odisha and Chhattisgarh account for 23 million tonnes per annum (mtpa) of expected capacity. In contrast, Hindalco, Sesa Sterlite, Bharat Aluminium Company, Jindal Steel and Power and Monnet alone need 39 mtpa of coal. Hence, competitive intensity is expected to remain strong.
The recent guidelines on coal mine auction have also come as a dampener for domestic producers. According to the guidelines, non-regulated sectors like metals might now have to pay international prices for coal. This would impact the return ratios of these companies, which have so far been higher than global counterparts, thanks to cheaper raw material.
The guidelines seek to differentiate regulated from unregulated sectors. While the government wants to prevent cost escalation in a regulated sector like power, unregulated sectors like metals, cement and captive power producers will have to cough up international prices for coal. The reserve price for these sectors will be linked to international prices and the highest bidder will get the mines.
Analysts believe with raw material prices inching close to international levels, the return ratios of Indian metal companies will decline. Higher coal costs will negatively impact the margins of these companies. Ambit Capital expects the return on capital employed (RoCEs) of these companies to be similar to global peers (high single digits).
Also, the Street expects the larger coal blocks to be diverted to power producers. Of the 74 blocks, 32 were previously held by steel, cement or aluminium producers. A majority of these are smaller blocks, designated for sponge iron.
Ambit Capital claims experts feel the larger blocks previously given to steel, cement, sponge iron or aluminium players could be re-directed to power, as this regulated sector remains top of the priority list. Analysts believe Hindalco could be a top loser and its new projects might not get an ROCE of more than five-seven per cent.
Also, competitive intensity is expected to remain strong, given the tight availability of mines and the clamour for these by metal producers. Analysts claim six large blocks spread over Odisha and Chhattisgarh account for 23 million tonnes per annum (mtpa) of expected capacity. In contrast, Hindalco, Sesa Sterlite, Bharat Aluminium Company, Jindal Steel and Power and Monnet alone need 39 mtpa of coal. Hence, competitive intensity is expected to remain strong.