Metals Monthly - September 2012 - Centrum

Metals Monthly Report - September 2012

Metalloid

Base metal prices improve, drop in steel production arrests steel price fall but persisting weak global demand remains a key drag

Global steel production dropped by ~4% MoM in Aug-12 which led to the arrest in falling steel prices and resulted in a sharp fall in raw material prices but end user steel demand has remained weak (especially in China & Europe). We see inevitable margin pressure for steel producers going ahead on the back of drop in realizations and volumes and expect meaningful improvements in profitability only in Q4FY13E. LME base metal prices have recovered smartly (monthly gains of 8-13%) on the back of positive announcements from ECB, FED and China. We see consolidation of steel and base metal prices at current levels due to cost support on the downside and weak demand exerting pressure on the upside. 

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Ferrous:

m  Monthly steel production stood at ~124 MT in Aug-12, down by ~4% MoM with a daily run rate of 4 MT/day and a capacity utilization of 75.5%, down by 390bps MoM. China’s production stood at 58.7 MT, down by ~5% MoM.

m  Global steel prices showed recovery from lower levels in China and US but remained subdued in CIS and Europe. Domestic steel prices have remained under pressure despite having import duty cushion and weak rupee on account of increased cheap imports and low domestic demand. We see global steel prices consolidating in the range of US$570-590/tonne going ahead with reduced level of steel production globally and slow improvement in demand.

m  Raw material prices have shown volatile movements. Iron ore prices have fallen to the range of ~US$110-115/tonne for 62-63% Fe grade; hard coking coal spot is trading at ~US$165/tonne. Coking coal contracts for Q3FY13 are set to settle near US$180/tonne

m  Domestic YTDFY13 steel demand growth stood at 6.9% and imports jumped 39%. Iron ore mining in Karnataka is expected to restart in a progressive manner from the current month.

Non-Ferrous:

m  Among base metals, LME average prices jumped by 8-13% MoM after announcements of QE3 by Fed and positive economic boosters from ECB and China. Current LME prices remain below marginal COP and inventories remained high despite some supply cuts by producers.

m  We see support for LME base metal prices at current levels but expect limited upside as we remain concerned on the low level of PMIs in Eurozone and demand fall in China

Mining:

m  NMDC is expected to announce price cuts for Q3FY13E on Oct 1 (we see a drop of 10-12%). Coal India has approved changes to its new FSA with 65% domestic supply trigger and imports on cost plus basis. GMDC is expected to announce merchant price hikes in lignite in Q3FY13E.

Our View : Negative on Ferrous, Positive on Mining

m  We remain positive on mining stocks based on strong balance sheets and attractive valuations. GMDC remains our top pick in the mining space followed by NMDC and Coal India. We maintain our cautious stance on the steel space and retain sell call on Tata Steel, neutral on SAIL and JSW Steel as we remain concerned on the lower margin profile and stretched balance sheets. We remain positive on non-ferrous space due to our expectation of sustenance of LME prices and maintain buy on HZL and Sterlite. Positive developments on HZL and BALCO stake buyout remains key positive trigger.

Thanks & Regards,