Tata Steel, Coal India And Other Metal And Mining Stocks Decline On Concerns Of Margin Contraction

Metal and mining stocks faced a notable downturn on Tuesday, with several major companies reporting declines.

Coal India Ltd. stock price was down 0.83% at market open but later recovered losses to trade at Rs 485.35 apiece, up 1.02%. APL Apollo Tubes Ltd. was down 3.58% at market open.

Tata Steel Ltd. was down 4.66%, trading at Rs 156.70 apiece. Steel Authority Of India Ltd. was down 3.29%, trading at Rs 127.84 apiece. Hindalco Industries Ltd. was down 3.19% and National Aluminum Co Ltd. fell 6.93%

This decline comes as an Axis Securities report raised concerns about potential margin contractions across the steel sector for the upcoming quarter.

According to the report, companies within the coverage may experience sequential margin contraction, primarily due to flat sales volumes quarter-on-quarter and a correction in metal prices. Specifically, the average hot rolled steel prices have declined by 8% year-on-year and 6% QoQ. Similarly, average London Metal Exchange aluminium prices dropped by 6% QoQ, although they remain 10% higher YoY.

The report outlines that both Tata Steel and SAIL are expected to see a drop in sales realisations due to falling steel prices. This trend is anticipated to lead to margin contractions, despite lower coking coal consumption costs providing some offset.

Aluminium producers, Hindalco and Nalco are projected to report margin expansion on a YoY basis, with Nalco highlighted as a strong earnings performer due to robust alumina prices.

Structural steel tube companies like APL Apollo Tubes may see declining Ebitda per ton, despite record-high sales volumes, as inventory build-up occurs amid decreasing steel prices.

The Axis report emphasises that all companies, except for those in aluminium, are likely to report margin contractions YoY.

The outlook for the steel sector remains clouded by ongoing uncertainty surrounding China's demand, particularly due to a sluggish property market. As of September 2024, China's manufacturing Purchasing Managers' Index has stayed below the critical threshold of 50 for five consecutive months, registering at 49.8. The year-over-year growth in "floor space started" has fluctuated, recovering from a low of -45% in August 2022 to -9.9% in December 2023, before declining again in early 2024, the report noted.

In the aluminium market, prices averaged $2,385 per ton in Q2 FY25, reflecting a 10% year-over-year increase but a 6% decrease quarter-over-quarter. Price fluctuations have been significant, with lows of $2,158 per ton recorded in late July 2024. However, prices rebounded above $2,500 per ton in September 2024, driven by expectations of increased demand as China transitions into its autumn season, alongside anticipation of a Fed rate cut and strong alumina prices.

Overall the report noted that while the steel sector grapples with challenges stemming from weak demand, recent stimulus measures in China may provide a pathway for recovery and stabilisation in prices.