 "Metal stocks see little potential for rebound")
In 2013, markets on the whole have not been on fire, but a noticeable laggard has been the metal stocks. Among other things, they have been hit by the pronounced slowdown in manufacturing and the dwindling business confidence.
Manufacturing growth, already, is on a downward swirl. Car sales, for instance, fell 6.69 per cent in April to March 2013. This has been the biggest fall in the automobile sector in India in the last 12 years. As a result of this, the growth in demand for steel has fallen and metals and mining companies that feed the steelmakers are also languishing. Aluminium, for instance, a key component for the automobile makers, was trading at $2,000 per tonne on the London Metal Exchange last year. It has been stagnating at that level for almost two years now. India's leading aluminum manufacturer, Hindalco, reported a 4 per cent drop in net profit in the third quarter of 2012-13. Hindalco's shares are trading at below Rs 90 per share. It hit a one-year low of Rs 86.90 on March 26 from a high of Rs 137 in January, dropping 34 per cent drop in three months.
At the current demand situation, nearly 25 per cent of the aluminium companies globally are making losses, Debu Bhattacharya, managing director, Hindalco Industries, had said after the announcement of the result. He said never before had the industry made losses for such a lengthy period (1-1.5 years) consistently.
Hindalco has been struggling for sometime now. The company bought the world's leading producer of rolled aluminium, Novelis Inc, for $6 billion in 2007. To facilitate further expansion, it came up with a rights issue of $1 billion in 2008, but investors were not enthused. The group's chairman, Kumar Mangalam Birla, had to hard sell the issue at the annual general meeting as investors remained concerned about the company's prospects. He urged investors to buy into the rights issue at an "attractive price" of Rs 96 apiece as it could be their only chance to buy the company's shares at such a throwaway price.
Hindalco, however, is not the only company struggling in the market. NMDC, the largest iron ore miner in the country, is down 20 per cent year-to-date; Sesa Goa's value has fallen 21 per cent year-to-date, while Nalco, Tata Steel and Hindalco are at the bottom with 26 per cent, 28 per cent and 31 per cent, fall respectively.
Steelmakers, with their sensitivity to the state of the economy, particularly to the fortunes of the automobile and construction sector, are also struggling. Tata Steel, which became one of the largest steelmaker in the world after buying Corus in 2007, for instance, is one of the worst performing large-cap metal stock in the world with a year-to-date fall of close to 30 per cent.
With the exception of Japanese steelmakers Nippon and JFE, most large-cap metal companies in the world, including POSCO of South Korea, BaoSteel of China, and Luxembourg-based ArcelorMittal, the world's largest steelmaker, are trading 1-22 per cent lower than their year-to-date prices.
Analysts say Indian companies have suffered more in comparison to their global peers because of the declining business confidence (See chart). In a note on Tata Steel dated March 25, 2013, Pinakin Parekh of JP Morgan Asia Pacific Equity Research, says: "Admittedly the near-term Indian (steel) demand environment is weak, but we expect FY14E to be better than FY13E driven by election spending. Europe, while not improving is unlikely to report numbers worse than FY13E."
Ankit Miglani, deputy managing director, Uttam Galva Steel, in an interview with Business Standard earlier this year had said that the business sentiment is actually worse off than in 2008. "In 2008-09, at least, there was steel demand in India. Right now, steel demand is half of what it should be," he had said.
The near-term outlook does not paint a promising picture. Copper prices are expected to fall by another 15 per cent in the current fiscal, while aluminium prices are unlikely to show any revival possibilities.
Poor demand has limited the scope for price increases as well. Steelmakers that raised their prices were forced to reconsider their decision. Companies feel that the current steel prices are the bottom and there will not be any more decline. However, they are not sure if the prices will go up because the demand for steel continues to be weak. According to data made available by Joint Plant Committee, the government body that tracks the steel metrics in India, steel production grew by a mere 2.9 per cent during April 2012 to February 2013, while consumption, grew by 4.1 per cent in the given period. In April-March of 2012, steel production and consumption grew by 6.6 per cent and 5.5 per cent, respectively.
However, CS Verma, chairman, SAIL, still paints a pretty picture for the steel industry. In an interview last month, he said that even though steel demand and production are half of what they should be, India is still better off than the rest of the world. He said, "We cannot insulate ourselves from the happenings of the world. What I'm saying is that we are still much ahead of what is happening to our global peers."
Manufacturing growth, already, is on a downward swirl. Car sales, for instance, fell 6.69 per cent in April to March 2013. This has been the biggest fall in the automobile sector in India in the last 12 years. As a result of this, the growth in demand for steel has fallen and metals and mining companies that feed the steelmakers are also languishing. Aluminium, for instance, a key component for the automobile makers, was trading at $2,000 per tonne on the London Metal Exchange last year. It has been stagnating at that level for almost two years now. India's leading aluminum manufacturer, Hindalco, reported a 4 per cent drop in net profit in the third quarter of 2012-13. Hindalco's shares are trading at below Rs 90 per share. It hit a one-year low of Rs 86.90 on March 26 from a high of Rs 137 in January, dropping 34 per cent drop in three months.
At the current demand situation, nearly 25 per cent of the aluminium companies globally are making losses, Debu Bhattacharya, managing director, Hindalco Industries, had said after the announcement of the result. He said never before had the industry made losses for such a lengthy period (1-1.5 years) consistently.
Hindalco has been struggling for sometime now. The company bought the world's leading producer of rolled aluminium, Novelis Inc, for $6 billion in 2007. To facilitate further expansion, it came up with a rights issue of $1 billion in 2008, but investors were not enthused. The group's chairman, Kumar Mangalam Birla, had to hard sell the issue at the annual general meeting as investors remained concerned about the company's prospects. He urged investors to buy into the rights issue at an "attractive price" of Rs 96 apiece as it could be their only chance to buy the company's shares at such a throwaway price.
Hindalco, however, is not the only company struggling in the market. NMDC, the largest iron ore miner in the country, is down 20 per cent year-to-date; Sesa Goa's value has fallen 21 per cent year-to-date, while Nalco, Tata Steel and Hindalco are at the bottom with 26 per cent, 28 per cent and 31 per cent, fall respectively.
Steelmakers, with their sensitivity to the state of the economy, particularly to the fortunes of the automobile and construction sector, are also struggling. Tata Steel, which became one of the largest steelmaker in the world after buying Corus in 2007, for instance, is one of the worst performing large-cap metal stock in the world with a year-to-date fall of close to 30 per cent.
With the exception of Japanese steelmakers Nippon and JFE, most large-cap metal companies in the world, including POSCO of South Korea, BaoSteel of China, and Luxembourg-based ArcelorMittal, the world's largest steelmaker, are trading 1-22 per cent lower than their year-to-date prices.
Analysts say Indian companies have suffered more in comparison to their global peers because of the declining business confidence (See chart). In a note on Tata Steel dated March 25, 2013, Pinakin Parekh of JP Morgan Asia Pacific Equity Research, says: "Admittedly the near-term Indian (steel) demand environment is weak, but we expect FY14E to be better than FY13E driven by election spending. Europe, while not improving is unlikely to report numbers worse than FY13E."
Ankit Miglani, deputy managing director, Uttam Galva Steel, in an interview with Business Standard earlier this year had said that the business sentiment is actually worse off than in 2008. "In 2008-09, at least, there was steel demand in India. Right now, steel demand is half of what it should be," he had said.
The near-term outlook does not paint a promising picture. Copper prices are expected to fall by another 15 per cent in the current fiscal, while aluminium prices are unlikely to show any revival possibilities.
Poor demand has limited the scope for price increases as well. Steelmakers that raised their prices were forced to reconsider their decision. Companies feel that the current steel prices are the bottom and there will not be any more decline. However, they are not sure if the prices will go up because the demand for steel continues to be weak. According to data made available by Joint Plant Committee, the government body that tracks the steel metrics in India, steel production grew by a mere 2.9 per cent during April 2012 to February 2013, while consumption, grew by 4.1 per cent in the given period. In April-March of 2012, steel production and consumption grew by 6.6 per cent and 5.5 per cent, respectively.
However, CS Verma, chairman, SAIL, still paints a pretty picture for the steel industry. In an interview last month, he said that even though steel demand and production are half of what they should be, India is still better off than the rest of the world. He said, "We cannot insulate ourselves from the happenings of the world. What I'm saying is that we are still much ahead of what is happening to our global peers."