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India metals and mining
Outlook uncertain, remain defensive
Commodity prices sustaining, but risks high
Our commodities team has mildly cut their steel, copper and zinc price forecasts,
but has raised forecasts for thermal coal, aluminium, and silver quite strongly.
Demand outlook, especially in Europe, has worsened, but all eyes are on China.
Our team estimates that China has gone through a destocking cycle driven by
tight liquidity and is well poised for a restocking cycle in 2012 that should support
commodity prices. Also, most commodities have cost support nearby, which
should also limit the downside. We are forecasting higher prices for aluminium,
copper and zinc from current levels, but expect steel and iron ore to correct a bit.
Domestic policies – also adding to uncertainty
Evolving Indian government policies and a highly active judiciary have added to
uncertainty for both existing and upcoming projects. A 26% tax on profits/amount
equal to royalty has been proposed to be levied as part of the upcoming Mining
Policy. This has the potential to reduce earnings by 2–10% for most companies.
The recent ban on iron ore mining in Karnataka, enquiries in Goa, and efforts to
limit the sale of iron ore from Orissa have made near-term projections difficult.
Maybe government companies alone look slightly safe in this environment.
Steel – margins nearing bottom
Steel margins have been trending close to zero and we see no further downside;
rather, we see a possible increase from FY13. However, for Indian companies,
possibly the margins will not improve much due to raw material integration or
domestic iron ore prices going up. We retain Jindal Steel and Power as our top
pick here. We retain Outperform on Tata Steel and JSW Steel as valuations are
very attractive, in our view, though risk factors seem high. SAIL is getting into the
value zone but wait for another quarter to get some more clarity on its
expansions.
Base metals – cost support, but inventory an overhang
Our team has upgraded aluminium price forecasts, and this has led us to push
Hindalco as our top pick, as well as upgrade Nalco to Neutral. We also upgrade
Hindustan Zinc to Outperform, given the sharp increase in silver price forecasts.
We retain Outperform on Sterlite given the distress valuations, but see limited
catalysts at the moment.
Bulks – iron ore and coking coal minor declines, thermal ok
Both iron ore and coking coal have held up pretty well, but we see some declines
in the near term. NMDC remains our favourite play on iron ore. GNC’s stock has
fallen sharply, but its fundamentals remain strong, and it is our preferred coking
coal play. We have upgraded even the long-term outlook for thermal coal, but
Coal India still remains a Neutral for us – we believe the street has run well
ahead on earnings estimates for Coal India, and will see downgrades that should
give a better entry point.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
India metals and mining
Outlook uncertain, remain defensive
Commodity prices sustaining, but risks high
Our commodities team has mildly cut their steel, copper and zinc price forecasts,
but has raised forecasts for thermal coal, aluminium, and silver quite strongly.
Demand outlook, especially in Europe, has worsened, but all eyes are on China.
Our team estimates that China has gone through a destocking cycle driven by
tight liquidity and is well poised for a restocking cycle in 2012 that should support
commodity prices. Also, most commodities have cost support nearby, which
should also limit the downside. We are forecasting higher prices for aluminium,
copper and zinc from current levels, but expect steel and iron ore to correct a bit.
Domestic policies – also adding to uncertainty
Evolving Indian government policies and a highly active judiciary have added to
uncertainty for both existing and upcoming projects. A 26% tax on profits/amount
equal to royalty has been proposed to be levied as part of the upcoming Mining
Policy. This has the potential to reduce earnings by 2–10% for most companies.
The recent ban on iron ore mining in Karnataka, enquiries in Goa, and efforts to
limit the sale of iron ore from Orissa have made near-term projections difficult.
Maybe government companies alone look slightly safe in this environment.
Steel – margins nearing bottom
Steel margins have been trending close to zero and we see no further downside;
rather, we see a possible increase from FY13. However, for Indian companies,
possibly the margins will not improve much due to raw material integration or
domestic iron ore prices going up. We retain Jindal Steel and Power as our top
pick here. We retain Outperform on Tata Steel and JSW Steel as valuations are
very attractive, in our view, though risk factors seem high. SAIL is getting into the
value zone but wait for another quarter to get some more clarity on its
expansions.
Base metals – cost support, but inventory an overhang
Our team has upgraded aluminium price forecasts, and this has led us to push
Hindalco as our top pick, as well as upgrade Nalco to Neutral. We also upgrade
Hindustan Zinc to Outperform, given the sharp increase in silver price forecasts.
We retain Outperform on Sterlite given the distress valuations, but see limited
catalysts at the moment.
Bulks – iron ore and coking coal minor declines, thermal ok
Both iron ore and coking coal have held up pretty well, but we see some declines
in the near term. NMDC remains our favourite play on iron ore. GNC’s stock has
fallen sharply, but its fundamentals remain strong, and it is our preferred coking
coal play. We have upgraded even the long-term outlook for thermal coal, but
Coal India still remains a Neutral for us – we believe the street has run well
ahead on earnings estimates for Coal India, and will see downgrades that should
give a better entry point.
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