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Subdued domestic demand due to a poor investment cycle, the coming Lok Sabha elections and important developments in the global markets are expected to keep the excitement out of metal companies for most of 2014, analysts and industry officials say.
With general elections a few months away and inflation at an all-time high, very little can improve in the prevailing investment cycle, they said. Due to this, demand for ferrous and non-ferrous metals will remain dull next year.
This year
Shares of metal companies were on a roller-coaster ride in 2013 and most fell sharply in the June to August period, as the rupee plummeted, increasing their cost of production. Demand improvement in Europe and America from September have pushed up revenues, in turn helping companies recoup their losses to some extent in the latter half of the year.
The BSE Metal Index had tumbled to an intra-day low of 6,354 on August 7 (a level earlier seen in April 2009), from a 2013 intra-day high of 11,510 seen on January 8, before recovering partly to 9,728 currently. The recovery, to an extent, is also due to higher domestic realisations as a result of the fall in the rupee's value.
“Nothing is seen improving on the demand side in the metals sector for the next six to nine months,” said Abhisar Jain, research analyst with Centrum Broking.
Metal stocks have peaked out and we don't see any incremental increase coming next year, said another analyst.
Ahead
Usually, no major decisions are taken by the government ahead of elections and so, not much is expected to change in the first half of 2014 at least, analysts said.
Also, realisations of metal companies, especially of steel, are likely to take a hit, as product prices will be ruling in their troughs due to weak demand, said an analyst from another brokerage here. Companies will have to rely on volume-led growth in 2014, she said.
State-owned Steel Authority of India Ltd (SAIL), which recently increased its annual capacity to 17 million tonnes this year from 14 mt earlier, might see some volume growth, along with JSW Steel which might boost its export volumes.
None of the non-ferrous companies, however, are seen witnessing any major volume increase next year, said analysts. Hindalco Industries’ Mahan aluminium smelter might see just about 100,000 tonnes in the first year in 2014, not a significant quantity, they said.
Analysts said cost-saving initiatives, increase in commodity prices later in the year and company-specific strategies might lend some support to metal companies next year, keeping intact the overall operating profits of most.
“Though the year might not be that great for metal companies, we don't see the profitability of these companies getting affected next year,” said an analyst with a domestic brokerage.
“In steel, overall, we see only a a three to four per cent demand next year,” said Giriraj Daga, senior analyst from Nirmal Bang.
Input prices
On raw materials, global coking coal prices bear the risk of an upward trend in the near term if weather conditions in Australia, the leading supplier of coal to steel majors across the globe, turn hostile. SAIL and JSW Steel largely depend on Australian coking coal imports, while Tata Steel meets about 60 per cent of its coking coal requirements from its own captive mines. Coking coal and iron ore are the two raw materials used by the steel industry in the making of the alloy.
“December to February is usually the period when cyclones hit Australia, causing disruption to mining and port activities,” said Jain of Centrum Broking. Due to this, prices of coking coal rise, on the back of tight supply, he said. At present, coking coal prices are stable at $150-155 a tonne.
On the domestic iron ore supply side, shortage of ore in Karnataka and an ongoing mining ban in Goa will continue to keep prices of the material elevated in coming months, said analysts.
Among the top steel companies, JSW has no captive source to meet its iron ore requirement. It relies on Karnataka ore to meet its need for the 10-mt plant, currently running at 75-80 per cent of capacity.
Strategies
Brokerages suggest that companies engage in aggressive marketing in not only the urban market but also in rural areas through their retail initiatives to have at least a volume-led growth. Tata Steel can engage itself in aggressive marketing strategies, especially at its European operations, to maintain or increase its volumes, they said. The company could also look to tap its non-traditional market to increase its customer base.
Demand in Europe has not looked up despite a better Purchasing Managers Index data. So, companies there will have to make additional effort to churn bigger revenue growth, said analysts.
For SAIL, increasing of steel exports and improving of efficiency should be the focal point. Brokerages are bearish on SAIL stock due to its high operational cost structure in a tough demand environment and competitive market.
“It will be a wait-and-watch period for the first six months at least. Once the new government is formed, there might be some spurt in construction and the manufacturing sector, we are hoping,”said an official from state-owned Rashtriya Ispat Nigam Ltd. “The steel sector will see slight uptrend in 2014 but cannot expect much buoyancy.”
Outlook
The trend in base metal companies will largely be driven by international factors such as economic growth in China and execution of the bond-buying tapering programme of the US Federal Reserve. Though the US Fed announcement will trigger a downside in dollar-denominated commodities such as base metals in the immediate near term, due to a knee-jerk reaction, firm global demand for these commodities is expected to take prices higher later in the year, said analysts.
Back home, brokerages are bearish on Sesa Sterlite due to company-specific issues such as high debt and unutilised capacities. The group is saddled with unutilised capacities at Vedanta Aluminium and Bharat Aluminium, despite having spent 90 per cent of the capex, said Centrum in its report.
State-owned National Aluminium Co Ltd, which is also currently hit due to weak demand for the light metal and pressured prices on the London Metal Exchange because of high inventories, will continue to see downside unless either of the factors catch pace. LME warehouses currently hold 5.4 million tonne aluminium.
“Unless we see aluminium prices moving up there is nothing that will change for aluminium companies,” said the analyst with domestic brokerage. The inventories are so high in aluminium that even if they fall, it will not lead to a major increase in aluminium prices, said the analyst.
In case of Hindalco Industries, cost escalations at new projects and lower than expected volume ramp up could be the negatives for the company, while increase in LME prices and clearance for coal mining at Mahan block would be the postives.
Both Hindalco Industries and Sesa Sterlite are into copper smelting and so prices of copper on the LME do not affect the business of the two companies. Hence, its the treatment charges-refining charges (TcRc) that matter most.
In 2014, the global TcRc benchmark is seen at $90 per tonne, higher from $72 seen this year. This is expected to help the two companies as their copper business will continue to do well, said analysts.
“Copper smelting companies were making money even at $72 Tc/Rc so anything higher than that they are surely to do welll,” said Daga of Nirmal Bang.
However, Sesa Sterlite’s copper smelting business contributes only 5 percent to the consolidated profit of the company, while Birla Copper contributes about 19 percent Hindalco’s consolidated profit. Due to this, gains from the copper smelting business will not really help respective companies turnaround their performance.
“Domestic demand (for metals) in 2014 is not going to be as good as it was in 2009 or 2010 but yes some demand will surely be there,” said a source from Sesa Sterlite Ltd. “First six months of the year it will be slow with the government forming and stablising but we are expecting it to pick up later and should be well in 2015,” he said. In the global market also we see a growth of about 3-4 percent next year, he added.
In contrast, most analysts are positive on Hindustan Zinc Ltd (a listed subsidiary of Sesa Sterlite) as lower cost of production and good demand for the zinc is expected to keep the company in the advantageous position through the year.
Global zinc prices should outperform amongst the base metals with support from Chinese consumption, said analysts.
Though analysts remained unanimous on not-so-good performance of metal sector in 2014, they also remained undivided on the view that the non-ferrous segment will perform better than the ferrous lot.
“We see 8-9 percent demand in the non-ferrous segment next year,”said Daga of Nirmal Bang.
