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Metals & Mining – 3QFY11 preview
Non-ferrous metal companies should post strong earnings on the back of robust underlying
commodity prices. Margins could remain under pressure for steel companies, especially for the
non-integrated players, due to strong iron ore and coking coal prices.
Steel margins face major headwinds following substantial rise in coking coal prices
We expect average realisations to have increased by about Rs1,000/t qoq for 3QFY11. We
expect margins to remain soft given high prices for iron ore and coking coal. The coking coal
contract price was US$209/t for 3Q. This will continue to hurt margins at SAIL and JSW Steel.
The 1QFY12 outlook for margins is particularly weak, as we believe coking coal prices could
touch new highs.
Non-ferrous – strong show; coal – weak volumes
Average LME spot prices of aluminium, zinc, lead and copper all increased between 12 and19%
qoq in the December quarter. Aluminium is currently at US$2,420/t, while zinc and lead are at
US$2,296/t and US$2,429/t respectively. Aluminium prices remain supported by supply
restrictions from China due to government-imposed energy efficiency-linked cuts. Commodity
prices have also been aided by QE2. While copper margins are independent of LME prices, the
increase in aluminium prices should impact Hindalco, Nalco and Sterlite positively. We forecast
24% qoq growth in HZN earnings, driven by volume and price growth. We expect Coal India to
report EBITDA of Rs25.5bn, with volumes at 106mt.
Hindalco, Sterlite and Hindustan Zinc are our preferred picks
Though price hikes of 3-5% in the new year will be positive for the steel majors, we expect
margins at JSW and SAIL to remain under pressure due to high raw material costs. 62% Iron ore
is trading at US$170/t, a seven-month high, while we expect coking coal contract prices for
4QFY11 to be 8% higher qoq on the back of supply constraints from flood-hit Australia. Among
non-ferrous, we believe Hindalco, with its robust expansion plans, is well geared for the expected
aluminium rally. We like Sterlite for strong earnings growth over FY12/13F through capacity
expansion across commodities. Key potential triggers include arbitration over the government’s
minority stakes in HZN and Balco. We have Buy ratings on Hindalco, Sterlite, Hindustan Zinc and
Sesa Goa. We have Holds on SAIL and Nalco and Sells on Coal India and JSW Steel
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