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METALS & MINING
n Fed announces QE2 on 3 Nov 2010 - We have a positive view on steel, metals
& mining stocks post official US Fed announcement of quantitative easing
which envisaged buying $600bn in new purchases and reinvesting $250bn to
$300bn of the proceeds from maturing mortgage backed securities over eight
months up to June 2011. We believe this is likely to not only support global
demand but also likely to flush enough liquidity to appreciate various asset
classes including industrial commodities like steel, base metals and ferrous commodities.
n PMI data has improved and stabilized – Purchase Manager Indices (PMI)
data for key geographies China, Europe and US was been hovering between ~
53 to 55 levels and that is supportive of the global commodity demand.
n Base Metals – Copper leads the pack as it rises to all time high levels
(i) Average LME copper price for Q3FY11 were up 30.4% Y/Y and 19.4% Q/Q
to $9665/t. Price performance was driven by 10.6% Y/Y and 10.8%Q/Q fall
in average copper inventories at LME.
(ii) Average LME aluminium price for Q3FY11 were up 17.2% Y/Y and
12.8%Q/Q to $2468/t. Price performance was supported by 6.2% Y/Y and
2.5%Q/Q fall in average aluminium inventories at LME.
(iii) Average LME zinc price for Q3FY11 were up moderate 5.5% Y/Y but up
smart 14.1%Q/Q to $2442/t. Price underperformance was due to sharp
jump of 44.7% Y/Y and more moderate 3.4%Q/Q in average zinc inventories
at LME.
n Steel prices have bottomed out, price hikes just begun - Domestic steel
prices trended downwards in October and November due to sluggish demand.
Steel makers rolled back most of the price hikes taken in early September to
align with lower global steel prices. But there has been remarkable improvement
in global prices in December driven by higher prices for key steel making
raw materials like iron ore, coking coal and scrap (see attached price charts in
the note). Indian steel mills started rolling back discount in mid-December 2010
and have hiked prices by Rs.1000-1500/t beginning Jan 2011. We see more
price hikes in the coming months driven by cost push and strong seasonality.
n SAIL - (i) SAIL is likely to report sales volume of 3.25mn tonnes for Q3FY11 up
12.1% Y/Y and 6.6%Q/Q. Expectations of steel price increase in Jan 2011
would have helped push up volumes in Dec 2010. (ii) SAIL is likely to report
revenues of Rs.117.25bn up 16.8% Y/Y and 9.8% Q/Q. EBITDA margin is however
expected to fall by 550bps Y/Y but rise 360bps Q/Q to 20.2% 17.1% primarily
driven by changes in global coking coal prices. We expect EBITDA of
Rs.23.73bn up 34% Q/Q but down 7.9% Y/Y. (iii) SAIL FPO is scheduled for mid
Feb 2011.
n Sesa Goa – (i) Sesa Goa is likely to report iron ore sales volume of 5.3mn
tonnes for 3QFY11 down 22% Y/Y. Shipments have been hit badly due to sustenance
of ban on export of iron ore from Karnataka and annulment of third
party mining contract in Orissa beginning Dec 2010. (ii) Average spot iron ore
fines export prices of 62%Fe grade were up 12.2% Q/Q while 58% Fe grade
were up by impressive 18.4% Q/Q. (iii) We expect Sesa Goa to report average
realizations of $86/t for 3QFY11 which is up 10.9 Q/Q and impressive 59.2% Y/
Y (iv) Sesa Goa is likely to report revenues of Rs.23.3bn up 23.5% Y/Y, EBITDA
of Rs.14.7bn up 41.9% Y/Y, PAT of Rs.12.01bn up 45.2% Y/Y and EPS of
Rs.13.98 up 38.6% Y/Y.
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