 "Rising zinc price to hit profitability of galvanized steel producers")
Rising zinc prices have impacted the profitability of galvanised steel producers hard because of their inability to pass the spurt in production cost on to consumers due to weak demand.
The price of zinc has risen over 19 per cent in November alone after hitting a five-year high on November 1. After bottoming out to touch $1,580 a tonne on the benchmark London Metal Exchange (LME) earlier this year, zinc rebounded on production cuts announced by major miners and smelters. Prices have jumped by 84 per cent, to trade on Monday at $2,907 a tonne on the LME.
The impact was evidently seen in the quarterly performance of Uttam Galva Steels Ltd, India’s largest galvanised steel producer, which posted a loss of Rs 93.56 crore for the quarter ended September 2016 as against a profit of Rs 15.93 crore reported in the corresponding quarter last year. The net loss of the company for the first half between April and September 2016, stood at Rs 326.97 crore, as compared to a net profit of Rs 34.17 crore in the corresponding period a year ago.
“Increase in the raw material cost for producing hot rolled coils was due to a rise in coke as well as iron ore prices. The consequential impact on hot rolled products and various downstream products like galvanised and pre-painted products has been in excess of $100. Apart from that, galvanised prices have been further impacted due to the zinc LME price index, which has moved to $2,907. On this account, the impact on galvanised products is approximately $25 to $30 depending upon the thickness,” said a senior industry official.
Apart from high prices, demonetisation of high value currency notes had a major effect on demand in the retail segment as well as in the consumer goods industry. It also impacted the automobile industry in a major way. The retail steel segment, especially the roofing and construction segment, which primarily deals in cash, had a negative impact as retailers have stopped purchases till they are able to manage cash flow. The appliance industry, which also uses coated steels heavily, has been severely impacted as most appliance manufacturers have cut down production and have indicated very low figures for December, 2016 citing heavy inventories.
An Edelweiss report said that consequent to progressive supply closures since 2013, mined zinc supply dropped to an 11-year low in the September 2016 quarter. With the closure of the Black Star mine in Australia, global mining capacity is further constrained. This follows closure of Century mine in Australia and Lisheen mine in Ireland (combined capacity of 0.6 mn tonnes) in CY15. Exacerbating the situation, LME inventory has been dropping continuously, touching a four-year low in Q3CY16, the report said.
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Meanwhile, primary zinc producer Hindustan Zinc Ltd (HZL), a Vedanta Group company, is bracing up for better profitability on expectations that the price rise will continue on reduced supply of zinc. HZL, being the lowest cost producer of zinc in the world, the price rise is expected to sustain its profitability.
“Being the only Indian company in integrated zinc production, HZL has invested almost Rs 20,000 crore towards expansion of mines and smelting operations since disinvestment. We are the world’s lowest cost producer of zinc and thus we do get benefit from any upward movement in LME prices, as that makes our bottom-line better and gives us scope for further investments in business to increase the volumes. Indian market is expanding and the focus is coming on galvanization in automobile and railway sector, zinc in fertilizers and as a nutrient. Use of zinc rebars, particularly in infrastructure built near coastal areas is also driving zinc demand,” said Sunil Duggal, Chief Executive Officer of Hindustan Zinc, the world’s leading and India only integrated zinc producer.
HZL posted net profit at Rs 1901.87 crore for the July ? September 2016 as compared to 2248.42 crore in the corresponding quarter last year. Total income from operation declined to Rs 3877.47 crore fro Q2, ’17 compared to Rs 4357.88 crore in the same period last year.