Metals sector eyes recovery as prices rise after scraping the bottom

Topics metals | S&P 500 | steelmakers

The S&P BSE Metal index is pointing towards a recovery in the metals segment. The index has jumped 22.4 per cent in the past three months, outperforming the benchmark Sensex by a wide margin. 

Steel companies have been increasing prices in this period, after hitting bottom. Base metal companies are also hoping for a demand revival and an improvement in order books. 

In the past one month, the London Metal Exchange (LME) is up 4.8 per cent, while prices of other metals like steel and iron ore are up 3.5 to 5.8 per cent.

Zinc heading for a supply shortfall

Major economies such as the US and China showed growth in zinc demand in 2019. In the first 10 months, refined zinc usage moved up slightly, rising 0.3 per cent to 11.33 million tonnes.

“The market is heading towards supply shortfalls combined with a surging demand. With current (global) zinc metal inventories at very critical levels, it’s a situation that is unsustainable,” said Sunil Duggal, CEO, Hindustan Zinc.

“Price levels were historically high at around $3,000 per tonne. The current price levels (around $2,300 a tonne), if prolong, will trigger mine closures, as near-$2,000 is a distress situation for marginal miners, which will hit supplies and put the market in more deficit,” he added.

Currently on the LME, zinc is trading at $2,300 a tonne. In India, as the use of galvanised products increases with expected infrastructure push, zinc demand will rise. Around 50 per cent of zinc is for galvanisation, which is used to tackle rust and corrosion in steel.

With a slightly positive outlook in construction, zinc demand, which saw a decline in growth in FY2019 and H1 FY20, is expected to end FY21 with positive growth, said said ICRA Senior Vice President Jayanta Roy.

Aluminium to bottom out

Aluminium demand growth in India moderated to around 2.5 per cent in H1 FY20, largely as a result of a slowdown in automobile sales and production in the country, according to ICRA. Growth in FY19 was 6 per cent.

About 30-40 per cent of aluminium demand is accounted for transmission and distribution line, while the balance is driven by packaging, construction and automobiles.

Balco Chairman S K Roongta said prices in November-December were at $1,700 a tonne levels. “These can't get below that," he said. At these levels, some smelters will shut down and overall there will be balancing of demand-supply, he explained. That could increase prices, but a major surge is not expected however, he added.

Copper, lead waiting for orders revival

LME copper prices fell sharply after April 2019 and remained under pressure till the end of November 2019. These have, however, moved up since those levels to $6,153 a tonne.

According to Hindustan Copper officials, the upside trend of copper LME prices will continue. There are several factors that can be attributed to it.

"The effect of partial trade resolution between the US and China may have helped LME prices of copper to rise. In the case of full resolution, a substantial upside is expected," an official said. They also added that a decline in warehouse stock of copper and projected deficit in 2020 clubbed with an increased infrastructure spending in China and India would expectedly keep the copper price on the higher side.

Sandeep Daga, director, Regsus Consulting, a Mumbai-based firm doing surveys of base metal producers and leading consumers in India, said, “Macro-economic data is stabilising globally. This comes after several quarters of steep industrial slowdown. While the sentiment could be lifting up, the order book has not shown material change so far.”

Monthly survey for the lead business in India, conducted by his Metal Survey, suggests that demand from the battery sector remains in the low gear. However, lead producers benefited with an improved order book in the recent months, though it may not sustain. 

Steel shines on pick-up in infrastructure

The recovery in zinc is driven by the same factors as steel. A demand pick-up on the retail side and government projects are the main reasons driving prices. Companies have been increasing prices since November after having hit the bottom in September.  

"After international prices started moving up, buying started immediately. That is how the increase in prices got absorbed," said JSW Steel’s joint managing director and group chief financial officer, Seshagiri Rao. He added that there was a positive momentum for the next quarter.

Infrastructure, construction and real estate account for about 55-60 per cent of steel demand, which is seeing a revival. The balance 40 per cent is accounted for by automobile, machinery and capital goods, which is expected to take longer to recover. 

In the past two weeks, prices of long steel products (ex-Ghaziabad) quoted on the ICEX commodity exchange went up 9 per cent, trading at Rs 32,000 per tonne. The price is of Gobindgarh mandi, the largest secondary market for steel products, and indicates that the secondary players see prices firming up.

According to ICRA's Roy, demand growth in steel for FY21 is likely to be 5-6 per cent.

Iron ore gets pricing power

Iron ore major NMDC has revised the iron ore prices by around Rs 200 per tonne, its first increase after seven months. Lump ore prices are at Rs 2,800 per tonne now, while the fines prices have increased to Rs 2,560 per tonne. 

The last upward price revision was in May 2019 after which it had to cut prices. Now the price is at the May 2019 level.

Large steel companies have started stocking iron ore, while small steel manufacturers have started panic buying, anticipating a shortage of iron ore in the market. NMDC has seen its sales grow 7 per cent to 3.04 mt in December 2019.

Industry representatives expect prices to increase by as much as 10-15 per cent over the next three months as the difference between domestic and imported iron ore is still high.

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