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Metals
FERROUSMETALS
• We maintain our medium term bias towards in favor of ferrous metals as demand environment supports steady volume
growth, and pricing power sustains margins. We expect EBITDA margins for Q3FY11 for domestic players to increase by
80bps on back of increase in average prices and benefits of lower raw material cost ‐ coking coal average prices declined
7% qoq
• We expect domestic steel prices to increase by Rs.1000 per tonne in Q4FY11 ‐‐ they are currently at a discount of
Rs1000 per tonne to imported steel. Our positive view is further corroborated by the strength in scrap prices – they
have increased by 13.6% last month to USD 406 per tonne on the back of strong demand from Turkey, India and China
• Domestic steel prices rebounded post the bottom in November when they were quoting below the marginal cost of
production. For the quarter, we estimate an increase of 3% on average quarterly realisations . Indian steel consumption
grew 7.1% (Apr‐Nov) led by flat products reflecting strong demand from consumer durables and automobiles. Demand
for long products continues to stay muted due to slowdown in execution of infrastructure / real estate projects
• Globally, prices have been under pressure during Q3FY11 in Europe and US as the effect of stimulus package on
demand got diminished while demand in China was affected by anti inflationary measures. Our market checks suggest
that international prices have rebounded strongly in December by 7‐9% primarily led by cost push and inventory restocking.
• Spot iron ore prices increased by USD 20 per tonne to USD 173 on back of supply cuts from India. Further to the ban of
iron ore exports from Karnataka, the state of Odisha has initiated clampdown on illegal mining. We expect contracted
iron ore prices to increase by 8% to USD137 per tonne (62% Fe) for Q4FY11 on back of strong spot prices. Further we
expect contract prices for coking coal to be set higher by 7% to USD225 per tonne for Q4FY11 led by healthy demand
and inclement weather in Australia. The total impact on cost of production for marginal steel players will be USD 37
per tonne (Rs. 1650 per tonne), which we expect to be passed during Q4FY11
BASE METALS
• Base metal average prices increased by 12% qoq and are now at two year highs. Copper and Lead prices increased by
19% and 16% respectively followed by Zinc (+14%) and Aluminum (+11%). Base metal prices, in the short term, tend to
be driven by the fund inflows into the commodities This commodities. move has accelerated on the back of QE2 by US Fed and
healthy numbers from China
• We expect EBITDA margins to improve by 304bps qoq for our coverage universe, primarily on back of improvement in
realizations due to increase in LME prices. TC/RC for copper smelters would increase by 78% yoy to USD 80/ 8cents for
the annual contracts (Jan‐Dec 2011). We also expect the copper concentrate supply verses the smelter capacity to
remain balanced verses the deficit in concentrate supply during 2010
Tata Steel
• Tata Steel is expected to deliver 14.5% CAGR volume growth over FY10‐13E led by expansions at Jamshedpur plant. We
estimate EBITDA per tonne at this facilities moves in the range of USD330 per tonne. We also believe Corus turnaround
is sustainable due to reduction in employee cost (Reduction in employee strength by 6500). Tata Steel is further
investing USD500mn in its Europe operations to further improve its operational efficiencies
• Tata Steel is strengthening its balance sheet with recent round of equity infusion by promoters and will raise about USD
1bn through selling of noncore assets like Teesside Cast products, holdings in Tata Power and Tata Motors. Further plan
are on to raise another USD 1.5bn in equity to deleverage Tata Steel Europe balance sheet
• Raw material integration projects like coking coal projects in Mozambique and iron ore project through New Millenium
will increase its iron ore integration to 38% and coking coal integration to 23% by FY14
• We believe Tata Steel is best placed in the rising steel price cycle with an opportunity to unlock value in its subsidiaries.
We maintain our Accumulate rating on the stock with a price target of Rs. 780 (6.5x FY12 EV/EBITDA in line with
multiple of global peers)
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