Risk-Reward Favours Ferrous Over Non-Ferrous Producers: Kotak Institutional Equities

Risk-reward is better for ferrous over non-ferrous producers as steel margins may recover by the second quarter of the current fiscal year, even as uncertainty may prevail for aluminium margins, Kotak Institutional Equities said on Wednesday.

The margins of steel companies are expected to see a correction of Rs 2,000 per tonne quarter-on-quarter in the first quarter, but they are expected to improve by the second quarter, according to a note. Aluminium prices and margins may continue to remain under pressure due to fading energy cost support.

Steel realisation may decrease due to price cuts, but this may be partially offset by contract resets and a better product mix in the June quarter, according to Kotak.

Coking-coal costs are expected to increase by $10 per tonne and iron-ore costs by Rs 500–600 per tonne in this quarter. However, once the high-cost inventory reduces by the second quarter, lower coal and iron-ore prices globally are expected to support margins, it said.

The margins of non-ferrous companies are expected to compress due to lower commodity prices for zinc and aluminium, but this will be partially offset by lower energy costs.

Zinc and aluminium prices have dropped by 18% and 5.3% quarter-on-quarter, respectively, in Q1. But the support from lower energy costs globally is fading, and the risk-reward combination is unfavourable for non-ferrous producers, according to Kotak.