Q3 Metals Preview – Non-ferrous metals to outshine ferrous counterparts

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Q3 earnings for metals companies likely to be mixed bag with ferrous metal companies expected to hit a road block after five quarters of strong momentum, while non-ferrous companies may fare better on the back of strong demand and better price realizations, according reports by brokerage houses.

Ferrous Metals

Raw Material Volatility

The quarter witnessed high volatility in the prices of two of the major raw materials used to produce steel. The average prices of coking coal surged steeply by ~48 percent from the previous quarter to USD 370/ton. The surge in prices was such that they touched a decade high price of USD 400/ton in October, 2021. On the other hand, the average prices of the other main raw material, iron-ore, slumped by 34 percent on-quarter to USD 110/ton.

Steel Prices

The steel prices on the other hand, rallied in October and November, but declined in December, bringing an end to the rising price scenario that was witnessed in the previous quarters. The domestic prices were also impacted by the sharp correction witnessed in the international steel prices. This led to a correction in demand and inventory destocking in the trade channels.

According to a report from Motilal Oswal, Hot Rolled Coil (HRC) trade prices were higher by Rs 2,138/ton (5%) QoQ and Rs 22,523/ton (48%) YoY. TMT prices on the other hand were up by Rs 7,135/ton (14%) QoQ and Rs 14,058/ton (32%) YoY.

“We expect blended realizations to increase only by Rs 500 - 700/ton given weaker mill realizations, lower export prices and lower price spread in the value added product chain (CRC-HRC)”, JM Financial report said.

Steel prices in the export market corrected sharply vis-à-vis the correction in the domestic market. India HRC FoB (free on board) prices corrected by USD 60/ton (6.7%) QoQ despite an increase in domestic steel prices. The report adds that, the discount on HRC export prices vis-à-vis domestic prices, which stood at Rs 600/ton at the start of the quarter, had widened to Rs 8,000/ton by the end of the quarter.

Declining demand

The demand in international market got impacted by the slump in property market in China and resurgence of COVID cases causing fear of lock down restrictions, holding buying activities in the market, said JM Financial in its report. As a result, demand has not picked up as expected across major economies, including India.

Hence, lower sequential exports and subdued pickup in domestic demand is expected to effect in lower volumes for steel companies during the quarter. Exports during the quarter stood 38% down implying higher reliance on domestic sales.

Motilal Oswal expects “most of the steel companies are likely to report higher inventory during the quarter due to lower sequential volumes”.

“Higher raw material cost and lower volumes more than offset modest increase in steel prices, affecting lower EBITDA and EBITDA/ton QoQ”, said JM Financial.

Financial Performance

An expected US$100/ton increase in coking coal cost, partially offset by lower domestic iron ore prices is likely to keep the EBITDA/ton fall contained to Rs 3,000/ton for most companies, in our view, said JM Financial.

Kotak Institutional Equities on the other hand, estimates EBITDA/ton for Tata Steel at Rs 28,435/ton (-11% QoQ), Jindal Steel at Rs 19,967/ton (-13% QoQ), Jindal Steel and Power at Rs 19,284/ton (-9% QoQ) and SAIL at Rs 10,291/ton (-37% QoQ).

Non Ferrous Metals

Non-ferrous names are expected to deliver a relatively stronger set of numbers with higher commodity prices, higher volumes offsetting the increase in energy costs / inflation QoQ.

According to the report from Motilal Oswal, “Non-ferrous metal prices at London Metal Exchange (LME) increased sharply during the quarter, driven by Alumina, Zinc, Aluminum and Copper, which rose by 31.9 percent, 12.7 percent, 4.4 percent and 3.5 percent respectively”.

The rise in prices on LME was also aided by the significant increase in energy prices in China and Europe and carbon emission related restrictions in China.

However, the sharp increase in coal, coke, and other input costs is likely to impact EBITDA for a few companies in the sector on a QoQ basis, Motilal Oswal said in its report.

Kotak estimates three digit annualized growth in the EBITDA of Hindalco India (standalone + Utkal) and National Aluminium Company.

It expects the EBITDA of Vedanta Ltd and Hindustan Zinc to increase by ~30 percent on-year basis mainly led by higher volumes and higher prices.