Metals Margins To Decline With Steel To Outperform Non-Ferrous In Q1, Say Analysts

The margins of metal companies may decline in the first quarter of fiscal 2024, with steel companies outperforming non-ferrous players, according to analysts.

Margins are expected to contract by Rs 2,000–3,000 per tonne, analysts said. But the performance may differ across companies given their prior-period inventory, product mix, and contract prices, according to ICICI Securities Ltd. Non-ferrous companies are expected to underperform owing to market surpluses in all key base metals.

Analysts estimate a 3-7% decline in revenues and close to a 50% decline in net profits for the sector. This decline is driven by lower metal prices, higher input costs, and weak global demand.

Steel companies are expected to report subdued performance due to suppressed steel prices and the consumption of high-cost coking coal inventory.

• Average domestic hot and cold rolled coil prices have corrected by 3% in the first quarter of FY24, while steel rebar prices declined by 8%. "Steel prices have approached their bottom," and no significant price corrections are expected in the near term, according to Motilal Oswal Financial Services Ltd.

• Prices of key input raw materials, including coking coal and iron ore, have cooled off this quarter. However, because steel manufacturers keep 60–90 days' worth of inventory on hand, Motilal Oswal predicted that the benefit of lower raw material costs wouldn't be apparent until the second quarter of FY24. Therefore, analysts expect a $6–20 per tonne increase in coking coal costs, depending on the level of prior-period (high-cost) inventory being carried.

• Domestic steel demand is expected to remain robust going forward as pending and stalled projects are pushed to completion before the upcoming state and general elections, the brokerage said.

• Volumes are expected to grow by 19% year-on-year on account of a low base in the previous fiscal, according to Kotak Institutional Equities.

JSW Steel Ltd. is the only company expected to post positive year-on-year growth of 7.5% in net profits in Q1, while Tata Steel Ltd. and Jindal Steel and Power Ltd. are expected to post declines of 96.5% and 50.8%, respectively, according to Bloomberg estimates.

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

• Zinc and aluminium prices have dropped by 18% and 5.3% quarter-on-quarter, respectively, in Q1, while Alumina prices fell 4% due to weak global demand, high interest rates, input price volatility, and a global supply surplus, according to the brokerage.

• Aluminium is facing concerns of oversupply globally, according to Motilal Oswal's weekly metal update released on July 3. After the start of the Russia-Ukraine war, many Western countries boycotted Russian aluminium, leading to a surge in aluminium inventory at the London Metal Exchange's warehouses.

• Aluminium companies should see sequentially lower prices, aided partially by lower coal costs, whereas the sharp decline in Zinc prices should lead to substantially lower margins for zinc producers, said Kotak.

• But the support from lower energy costs globally is fading, and the risk-reward combination is unfavourable for non-ferrous producers compared to ferrous players, according to Kotak and ICICI Securities.

Hindalco Industries Ltd.'s net profit is estimated to decline by 43.2% YoY, according to Bloomberg estimates. Vedanta Ltd. is expected to post a 25.6% decline in net profits, while its subsidiary Hindustan Zinc Ltd.'s profits are expected to fall 37.2%.