Prices remain subdued, margin pressure
building up, lower coking coal cost only
hope but not enough.…
Global steel prices remain subdued with sharp fall in China, steady
correction in domestic market, subdued movements at lower levels in CIS
and Europe but in US there was a mild recovery. Global steel production run
rate in July stood at 4.2 MT/day with capacity utilization of 78.7% and raw
material prices softened. We see inevitable margin pressure for steel
producers going ahead on the back of drop in realizations and volumes
amidst weak domestic demand. We believe that steel prices could be close
to their bottom globally but don’t expect sharp recovery without significant
supply cuts. LME base metal prices remained soft (well below marginal COP)
as concerns in EU got heightened and PMIs kept trending lower.
Ferrous
Monthly steel production stood at ~130 MT in July-12, up ~1.9% YoY with a
daily run rate of 4.2 MT/day and a capacity utilization of 78.7%, down by
170bps MoM. Supply still remained high despite production cuts and falling
steel prices. China’s production stood at 61.7 MT.
Global steel prices remained depressed with Chinese HR prices falling by
~8% MoM to US$570/tonne. In Russian and CIS markets HR price was at
~US$550/tonne and in Europe prices were near US$600-610/tonne.
Domestic steel prices have corrected by ~5-6% over the last 2 months
despite the import duty cushion and weak rupee on account of increased
cheap imports. However, US steel prices recovered and global production
cuts from steelmakers could limit the steel price fall from hereon.
Raw material prices have shown weakness and iron ore prices have fallen to
the range of ~US$110-120/tonne for 62-63% Fe grade; hard coking coal spot
is trading at ~US$185/tonne. Coking coal contracts for Q3FY13 are set to get
settled near US$190/tonne which could bring some relief to steelmakers.
Domestic Apr-July steel demand growth stood at 7.7% and imports jumped
36%. Iron ore mining in Karnataka is expected to restart in a progressive
manner from the current month.
Non-Ferrous
Among base metals, LME average prices remained subdued and the fall has
continued. Current LME prices remained below marginal COP and
inventories were high despite some supply cuts by producers.
We see support for LME base metal prices at current levels but remain
concerned on drastic drops in PMIs in Eurozone and demand fall in China.
Vedanta is looking to take shareholder’s approval for paying higher amount
for stake buyout in HZL and BALCO from GoI.
Mining
NMDC has taken QoQ price hike of 8% for fines and 13% for lumps for
Q2FY13E. Coal India has made changes to its new FSA with 65% domestic
supply trigger
Our View : Negative on Ferrous, Positive on Mining
We remain positive on mining stocks based on strong balance sheets and
attractive valuations. NMDC remains our top pick in the mining space
followed by GMDC and Coal India. We maintain our cautious stance on the
steel space and retain sell call on Tata steel as we remain concerned on the
severe drop in profitability in Europe going ahead. We remain positive on
the non-ferrous space on volume growth and our expectation of reversal in
LME prices and maintain buy on HZL and Sterlite. Positive developments on
HZL and BALCO stake buyout remains key positive trigger.
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