Metal companies are likely to post mixed earnings in the September 2023 quarter. Ferrous firms are likely to show stable-to-higher margins, despite lower steel prices, thanks to reduced coking coal costs, while non-ferrous producers may see margins shrink on lower prices and volumes, partially offset by lower cost of production, analysts said.
Ferrous metals
Iron and steel companies are expected to report decent volume growth in the September quarter, ranging from 6 percent to 16 percent on-year, despite the seasonally weaker period. However, they might face a drop in their average selling prices by around Rs 2,500-3,000 per tonne due to lower spot prices and the absence of higher-priced export carry-overs from the previous period. Among ferrous players, those focusing on long steel, especially in the secondary sector, may see a more significant decline in selling prices compared to those dealing with flat steel, analysts said.
While ferrous companies could benefit from lower coking coal costs, this advantage may be offset by a decrease in their average selling prices. During the quarter, the price of long steel fell by Rs 3,000 a tonne on-quarter, and flat steel decreased by Rs 900 a tonne sequentially. The average coking coal costs are expected to decrease by $45-55 on-quarter, while iron ore costs are down by Rs 400.
Among specific companies, SAIL is likely to achieve the highest sales volume growth at 16 percent, while JSPL may have the lowest growth at around 6 percent. However, Tata Steel is expected to experience a slight decline of 1.5 percent in its standalone business and a more significant 10 percent decline in its European business on a quarter-on-quarter basis, according to analysts.
Non-ferrous metals
Non-ferrous metal companies are expected to see reduced profit margins due to lower costs for thermal coal, anode, and caustic soda. However, this decline in profitability is likely to be balanced out by lower LME prices, as noted by analysts.
During the quarter, LME aluminum and zinc both saw a 5 percent decline, while lead increased by 3 percent, and crude oil gained 10 percent, compared to the previous quarter. Additionally, the rupee depreciated by 1 percent against the dollar during this period. Most companies in this sector are expected to reduce their Cost of Production (CoP) by 2-5 percent, although sales volumes may vary among companies, analysts said.
Hindalco's Indian aluminum operations are likely to see a 3.7 percent decrease in EBITDA per tonne to $705 due to lower selling prices, partly offset by reduced coal costs. Novelis, on the other hand, is expected to recover in Can stock sales, leading to a 3.4 percent increase in volume. However, due to changes in the sales mix, analysts anticipate a 2.9 percent decline in EBITDA per tonne to $465.
A drop in zinc prices is projected to cause Hindustan Zinc's EBITDA to fall by 16 percent quarter-on-quarter. For Vedanta, excluding Hindustan Zinc, analysts estimate a 3 percent decrease in EBITDA to Rs 3,600 crore.
Mining
In the mining sector, operating profits are expected to increase in Q2FY24 due to higher iron ore prices (10 percent YoY) and increased sales volume (15 percent YoY) for NMDC. This leads to a substantial 56 percent on-year increase in its EBITDA to Rs 1,330 crore, with an EBITDA per tonne of Rs 1,372, up 36 percent on-year.
Similarly, Coal India is likely to report higher profits on an annual basis, thanks to increased volumes and a rise in forward sales agreement (FSA) realisation. However, there will be a slight decrease in the blended realisation (4.6 percent to Rs 1,700 per tonne) primarily due to steel decline in e-auction premiums (85 percent from 329 percent pm-year). Despite this, the overall EBITDA per tonne is expected to be Rs 573, up 10 percent on-year.
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