Motilal Oswal has come with its March quarterly earning estimates for Metals sector. As per the research firm, steel prices are expected to soften gradually due to demand slow down in China due to falling fixed asset investment.
Steel prices improved QoQ across geographies:Steel HRC prices improved in 4QFY12 across major geographies after declining significantly in 3QFY12. Current prices are 11%, 11%, 7% and 6% higher than their 3QFY12 lows for Russia, Europe, North America and China, respectively. However, on a sequential basis, prices have declined by 2% in Russia, remained flat in China, and increased 4% and 9% in Europe and North America, respectively. Price recovery on restocking and production cuts rather than improvement in real demand:
Current prices recovery was the result of restocking and production cuts rather than any improvement in underlying demand scenario. Prices have already started correcting in North America as restocking demand seems to be over. Similarly, Chinese steel demand was also the function of restocking by traders rather than actual consumption. Chinese steel inventories held by traders across major cities are already close to its three year peak level. Further, production cuts (indicated by the two-year low global crude capacity utilization level) have also supported prices. Any further price appreciation can only be supported by significant production cuts amidst increasing concerns of a slowdown in China. 4QFY12: What to expect; what to watch out for:
Indian long s teel prices are up 5% QoQ, which will bene fit SAIL, JSPL and TATA. SAIL and JSW mar gins to expand in absence of forex loss. Deteriorating quality and quantity of iron ore in Karnataka has affected JSW volume growth.
Tata Steel Europe to benefit from higher European prices and lower input prices. TSE EBITDA per ton to improve to USD38 from USD -44.
Sesa's volumes are affected due to continued mining ban in Karnataka and logistic bottlenecks in Goa.
JSPL to benefit from higher steel volumes on liquidation of the inventory. Realization to improve QoQ on higher share of long product in the portfolio.
Non Ferrous margins to expand on higher base metal prices. FY13, FY14: Outlook, assumptions, sector strategy:
We expect steel prices to soften gradually due to demand slow down in China due to falling Fixed asset investment.
Leading producers like SAIL, Tata Steel and JSW Steel will deliver growth as brownfield projects augment capacities.
Indian steel producers' margin will remain under pressure due to softening steel prices and inflation in local costs, although weaker coking coal prices will partly help.
Zinc and copper volumes are likely to remain stagnant. There will be some growth in lead and silver production due to capacity expansion.
Balco, VAL and Hindalco have invested/are investing in new greenfield smelter capacities. Future of these projects is uncertain due to delay in bauxite/coal mines.
| (INR million) | ||||
| Company | Sales | Net Profit | ||
| Mar-12 | Var. % (YoY) | Mar-12 | Var. % (YoY) | |
| Hindalco | 194,819 | -3.9 | 7,079 | -36 |
| Hindustan Zinc | 30,376 | -6.2 | 14,928 | -15.7 |
| JSPL | 53,205 | 38 | 11,606 | 16.6 |
| JSW Steel | 84,558 | 19 | 5,170 | -37.4 |
| Nalco | 16,364 | -10.4 | 1,205 | -60.5 |
| SAIL | 135,021 | 11.3 | 10,996 | -22.4 |
| Sesa Goa | 25,997 | -28.3 | 10,079 | -30.9 |
| Sterlite Inds | 105,094 | 4.5 | 13,560 | -21.8 |
| Tata Steel | 353,359 | 4.5 | 13,657 | 15.5 |
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