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Metals & Mining (Global demand revival, higher raw
materials) Neutral
In CY10, (YTD Nov ’10), world steel production stood at 1278 million tonnes
(MT), up 17% as compared to the similar period last year. Steel prices
globally have increased by 21% to $680 and are currently hovering in the
range of $650-700. Despite an increase in steel prices most steel companies
have witnessed margin pressures mainly on the back of higher prices of key
raw materials like iron ore, which was up ~55% to $170 (spot CFR price for
China import 62% FE grade) and coking coal prices, which were up 7% to
$298 (spot CFR price for China first grade coking coal). The global steel
demand scenario is hazy as the European construction sector is yet to pick
up and there was a softening of steel demand in China on the back of a
slowdown in investments in real estate. Domestic steel demand is expected
to be healthy but domestic steel companies are likely to face margin
pressures due to rising raw material prices.
⇒ China has a significant impact on global steel demand. The Chinese
government has introduced various monetary tightening measures
in order to curb the growing inflation. Under these measures, the
government is discouraging investment in real estate in order to
bring property prices under control. This has led to a slowdown in
demand for steel in China, which will impact overall production and
demand for steel
⇒ Aluminium demand has recovered strongly since the global
recession faded out. This has given significant support to price.
Aluminium prices have increased by 8% YoY whereas inventories
have declined by 8%YoY. At the current level, inventories on the
LME are still at the higher end. We believe that despite a revival in
demand, prices are expected to remain in the range of ~$2300-
2500/tonne. Similarly, lead prices have increased by 5% YoY to
$2400/t whereas zinc prices have declined by 7% YoY to $2200/t.
Inventories on LME for both metals have increased by ~45%
⇒ Copper prices of have increased by 33% YoY (from ~$7000/t in Dec
‘09 to ~$9400/t in Dec ‘10) whereas copper inventory has declined
24%. Copper is expected to remain in deficit next year also. This can
lead to a further up move in prices. On the back of increasing copper
prices, the TC/RC margins are expected to improve
Currently, Indian steel players are trading at FY11E EV/EBITDA of 6.6x,
~35% discount compared to global peers, which are trading at an average
EV/EBITDA of 10.5x. Similarly, domestic non-ferrous players are trading at
FY11E EV/EBITDA of 7.5x, ~50% discount to global peers, which are
trading at EV/EBITDA of 15.3x. However, historically Indian companies have
traded at similar discounts to its global counterparts. Hence, we believe that
currently metals stocks are trading at their fair valuations. However, if
positive clarity on global demand and supply gets valued, expect the metal
sector to put up a better show in CY11.
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