Analysts expect metal prices to recover in FY12, as slowdown concerns are overdone.
Investments by foreign institutional investors are typically driven by global cues. Just as they had started selling banking stocks when the news of a credit crisis in Europe started brewing, they were selling metal stocks in the September quarter. With the world economic climate cooling, the demand for metals is expected to moderate in the second half of this financial year. Coupled with this, fortunes of some Indian companies have been hit due to environmental issues, thereby, triggering a sell-off.
According to Nirmal Bang’s analysis of ownership data for the September quarter, FIIs pared their holding in all large metal companies by 2-13 per cent. The only exception was Coal India, wherein they raised stake by one per cent. Foreign ownership in Hindustan Zinc and JSW Steel dropped to 21-quarter and 18-quarter lows, respectively. While FII holdings in Tata Steel and Sterlite Industries dropped to a nine-quarter low, they slumped to an eight-quarter low in the case of Jindal Steel & Power.
Domestic institutions, on the other hand, have been buying metal stocks moderately. While they increased their Tata Steel holding by 1.21 per cent to 27.1 per cent in the quarter, the highest in the past 34 quarters, they pared their stake in JSW Steel from 0.6 per cent to just 0.2 per cent in the same period, says Nirmal Bang.
Global uncertainties have already resulted in a correction in the prices of base metals, which is expected to impact metal companies’ earnings. China, which has been a major driver of demand in the metals market, has also seen production levels fall. Quoting a TSI iron ore monthly report, a report in Scrap Monster says iron ore prices slumped 31 per cent over the month, as increased spot supply, particularly from Australia, was met with lukewarm buying interest from Chinese mills.
“There is a chance the general market sees lower Chinese production rates, particularly for steel and aluminium, as another sign that Chinese demand is collapsing. In our view, such production adjustments would actually be a positive and highly necessary step in bringing the metals markets back to balance,” says Macquarie Research.
Apart from a slowdown in the production of steel and aluminium, production of Chinese refined copper was down eight per cent month-on-month to 457 kilotonnes in September, as a result of tightening concentrate supply from the global mining industry. However, production of nickel and zinc remained strong. What does this mean for metal companies? Edelweiss Capital says: “China will continue to drive the global aluminium market, which we estimate to surge by a robust 11 per cent in 2011 and seven per cent in 2012 despite the fragile demand from the US and Europe.”
Despite the fall in the prices of metals, analysts are confident that prices would bounce back in FY13, even if demand moderates slightly. For instance, the ratio of aluminium prices (energy proxy) and Brent crude is at an all-time low, says Edelweiss Capital. “The price for incentivising new supply is $3,230 a tonne, while our long-term price is $2,700 a tonne, both significantly higher than current prices.”
