The dream run for metals may well continue in the current quarter as targeted stimulus in China will continue to prop up demand, while continuous printing of the dollar coupled with the low interest rate regime, should favour investments in commodities, said a report by Emkay Global Financial Services.
According to the report on metal and mining sector by the brokerage, the current run of rising metal prices in line with demand revival in autos, white goods, infrastructure segment and trade re-stocking with lower coking coal prices should result in dream profitability for most companies that witnessed one of the worst phases during the lockdown period last year.
Steel prices have already touched an all-time high in the domestic market and are currently hovering around Rs 57,250 per tonne. Through Q3, HRC (hot roller coils) and Primary rebar prices increased by Rs 12,000 per tonne and Rs 15,500 per tonne, respectively. On average, per-tonne HRC/Rebar prices were up by Rs 6,500-Rs 7,200.
Higher prices have also been supported by increase in iron ore prices, which on an average, rose by Rs 1,270 per tonne in Q3, driven by strong steel production and also iron ore shortage after the auction of 19 mines in Odisha which did not match up the production rates prior to the auction.
Prices for steel, iron ore and non-ferrous metals rallied throughout the quarter, driven mainly by pent-up domestic demand and domestic economic recovery as the businesses grow post the lockdown. Hike in international prices driven by targeted stimulus in China and restocking demand in the domestic market has also supported the rally in the metal space.
According to the brokerage report, the best is yet to come for the sector in Q4. While the coking coal prices have remained subdued due to restrictions on the imports of coal in China with Australia origin, leaving the coal market significantly oversupplied, we witnessed continued hike in steel prices, driving domestic EBITDA per tonne to record highs across the board. This should result in accelerated deleveraging by all major steel mills, except for JSW Steel which still has Rs 19700 crore acquisition pending, the Emkay report said.
It added that along with steel, non-ferrous metals should also maintain strong growth in prices on the back of strong demand coming from Chinese imports.
On the mining side, however, the companies had a mixed quarter. While NMDC has ramped up both production and prices to record, driven by strong steel production, Coal India saw an increase in offtake month on month. However, e-auction premiums remained volatile. MOIL saw a drop in pricing due to oversupply in China before hiking prices again in December.
"The deleveraging of the balance sheet should be the focal point of all major steel mills. We expect cash-rich commodities stocks such as Coal India, HZL, NMDC, MOIL and Nalco to declare higher dividends, while leveraged non-ferrous companies such as Vedanta and Hindalco to focus on deleveraging the balance sheet in this upcycle," the report said.