Metal firms cheer rebound in prices

Commodity prices have seen a reversal in trend, especially all industrial commodities that were not doing well for the last few years after China's economy started cooling down and several metal producers started cutting production of closing mines. 

The reason is demand-supply balance improving in favour of prices and reports of China settling down for better time after depreciation of its currency which is at six-year low. Indian metals companies see their margins improving. Steel companies are enjoying protection but rising prices of iron ore and coal are taking away protection benefits from the other side.

In last three weeks, base metals have seen a sharp rally initially and most industrial raw materials have risen 10-25%, "all base metals are in uptrends and the most important driver is obviously China's economy looking far more stable now. But also investors are coming back to commodities," said Andrew Cole, Principal Metals Analyst, Metal Bulletin Research.

And rising metals prices have brought smiles back to Indian manufacturers. Despite higher copper prices, industry is gaining pricing power. As explained by an official from Hindustan Copper, "higher copper prices means better realisations for us. Demand for copper continues to be strong and enquiries are flowing in despite price rise. Some fresh enquiries have also come in and we see this trend continuing. Demand is more from white goods and electrification segments, which are two major segments for copper consumption. Even if prices have moved up, market is comfortable with the hike."

While most metals bottomed out since beginning of this financial year, other movements have been volatile but Zinc has seen a V shape rally. Sunil Duggal, Chief Executive Officer of Hindustan Zinc, the world leading and India's only Zinc-Lead-Silver producer said, "Zinc prices have recovered sharply in current financial year that has certainly helped to improve Hindustan Zinc's bottom-line. Any rise in price in commodities does impact the user industry. Zinc is an essential metal being used in various forms and the rise in zinc prices have been taken in the right stride by the user industry."

Steel companies received several protective to face cheap import threat like minimum import price, anti-dumping duty and so on. However, the rising coking coal prices which have more than doubled in last three months have increased the cost of production. The average coking coal price for Nov-16 was at $260/ton vs $115 three months back and rising iron ore price which is now at $74 per ton, a 25% rise in just last three weeks have taken away a large part of protection measures benefits. But internationally steel prices have also gone up. Ashish Jain, Equity analyst, Morgan Stanley Research said, "we believe that the industry will be able to raise product price," as local prices are still 14% lower than import price and international prices are rising which will provide cushion to Indian steel companies. Companies dependent on outside ore supply may not do that well as those with captive ore supply.

Sanjeev Ranjan, Managing Director at International Copper Association is however worried for short term especially due to demonetisation. He said, "there may be some disruption in terms of demand for a short period. We will have to wait and watch how consumption pattern pans out as liquidity will be affected due to demonetisation." While cost of raw material is rising, he said, "consumers are switching to more energy efficient equipment from lower energy efficiency equipment. Steel and chemical industries have also aligned themselves to better energy efficient equipments which have lent good demand support in the domestic market".