Moneycontrol Pro Panorama | Metal companies look East for relief

market

Dear Reader,

China took the markets by surprise, after it announced a series of measures aimed at providing a monetary stimulus. The one-year loan prime rate (LPR) was cut by 10 basis points to 3.35 percent and the 5-year LPR by 10 basis points to 3.85 percent. The People’s Bank of China also said it will cut the 7-day reverse repo rate by 10 basis points to 1.7 percent and improve the mechanism of open market operations, according to a Reuters report.

The report also mentioned that a report from the official China news agency Xinhua quoted sources close to the PBOC as saying “the cut showed its determination to bolster the recovery and it was in response to the plenum’s aims to achieve this year’s growth target”. We had written about the China’s Third Plenum, its importance and what it could seek to achieve. While the Plenum has concluded, the 60-point document released did not point to any major policy shift, reaffirmed policy goals but did not lay down implementation steps, according to this Reuters report seen on Moneycontrol.

That’s why the monetary measures come as a surprise as they did not wait for the US Fed to start its easing cycle to follow suit. It opens up the possibility that when the Fed does start its cycle, China may take more measures then. If these measures are followed up with some fiscal measures as well, then the hope is that China’s economy climbs to a more robust level of growth.

India’s metals industry will be keen awaiting a revival in China’s domestic economy. JSW Steel’s Q1 results reflect the scars of China’s surplus position in steel as its companies continue to churn out excess output despite the state of the economy. It has been exporting steel with the neighbouring countries being the main target. My colleague Lekha Badlani analysed JSW Steel’s performance in the June quarter, which showed that per tonne realisation, on a consolidated basis, fell by 5.1 percent YoY.

She writes, “Excess dumping by China in the export market has become an increased cause of concern recently. This is likely to keep steel prices range-bound. However, JSW is more focused on value-added special steel products in its portfolio, which should support realisations.” China’s steel exports not only hurt prices but also affect the volume of exports from India as lower realisations make it unviable.

China’s moribund domestic economy also puts downward pressure on metals prices. While steel prices have been under pressure, it is also putting pressure on iron ore and coking coal prices. Similarly, the non-ferrous complex is also under pressure with copper, aluminium and zinc prices falling significantly in recent months.

Now, falling commodity prices may be good for user industries such as construction, automobiles and infrastructure. However, it’s bad news for India’s metal companies as they find their realisations under strain, which in turn will put their profitability under pressure. This will also limit their appetite for making further investments in capacity addition and lead to delays in existing plans.

One of the ways in which the government can support domestic metal companies is to impose higher tariffs on imports, limiting price erosion. But as in all such measures, the user industries will suffer from higher duties. Tomorrow’s Budget could give us an idea of whether the government believes that basic industries such as metals need more protection from cheap imports. If it does, then investor sentiment for metal stocks could perk up. But a bigger boost can come from China’s success in kick starting a domestic-economy led growth recovery.

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Ravi Ananthanarayanan
Moneycontrol Pro