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MetalSectorUpdate_September2013

MetalSectorUpdate_September2013

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Published by Angel Broking
13th September 2013
13th September 2013

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Categories:Business/Law
Published by: Angel Broking on Sep 13, 2013
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11/20/2013

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Please refer to important disclosures at the end of this report
 1 
Global positives fuelling rally in metal stocks lately:
Over the past one year, wehave seen declines in stock prices alongside frequent earnings downgrades forMetals and Mining sector companies. This is because global and domestic metaland base metal prices have broadly slid during CY2013 (upto August 2013).However, Metals & Mining stocks have rallied by 5-35% over the past one monthon the back of positive news flows across the globe, especially China, alongsideINR depreciation against the USD.
Some gains for steel companies likely:
For steel companies, these factors make acase for increase in realizations and better volume growth (due to higher exportprospects and also import substitution due to INR depreciation). However,domestic steel demand remains weak in the near-term. Steel consumption growthdeclined to multi-year lows to 3.3% yoy during FY2013. Further, real steelconsumption in India rose by just 0.3% yoy during April – August 2013 due to lowdemand from construction and automotive sectors. Nevertheless, we expect a3-4% improvement in realizations for domestic steel companies during2HFY2014, compared to announced price hikes of 6-7%.
Base metal stocks to benefit the most due to weak INR:
Base metal companies(mainly aluminium and zinc producers) price their products based on LME spotprices which are dollar-denominated. These companies are likely to be the realbeneficiaries on the back of INR depreciation against the USD as there is highlevel of consolidation in the aluminium and zinc sectors in India. Hence,INR depreciation makes a strong case for increases in realizations of zinc andaluminium companies, but not of steel companies where low domestic demandcoupled with fragmented domestic industry play a spoilsport.
We upgrade some stocks
: For steel makers, a weakening rupee raises landed costof steel imports, thus giving higher pricing power to domestic steel players. It alsoraises coking coal costs (a key raw material in steel making) which partially offsetsthe impact of price hikes. Steel companies have also announced price hikes in therange of 3-7% effective September 2013. However, weak domestic demand(April- August real consumption grew only 0.3% yoy) alongside fragmenteddomestic industry is likely to partially spoil the party; these hikes will be partially rolled-back in the form of discounts, in our view. Nevertheless, we continue to likecompanies with captive assets, strong visibility on earnings growth over thecoming few years, low leverage levels and inexpensive valuations.
Tata Steel,Hindustan Zinc and NMDC still remain our preferred bets.
 
Bhavesh Chauhan
Tel: 022- 39357800 Ext: 6821bhaveshu.chauhan@angelbroking.com
Vinay Rachh
Tel: 022- 39357600 Ext: 6841vinay.rachh@angelbroking.com
 
Sector update
Sector update | Metals
September 13, 2013
 
 
Metals |
 
Sector update
September 13, 2013
 2
Improvement in macro-economic data from some major regions:
News flows onthe macro-economic data have been positive across some major economies,especially China, which consumes ~40-50% of metals such as steel, aluminium,zinc etc. Some global lead indicators such as Manufacturing PMI indices and BalticDry Index have shown an uptrend lately.
Exhibit 1:
 
China Manufacturing PMI
 Source: Bloomberg, Angel Research
Exhibit 2:
 
US Manufacturing PMI
 Source: Bloomberg, Angel Research
 
Exhibit 3:
 
Eurozone Manufacturing PMI
 Source: Bloomberg, Angel Research
Exhibit 4:
 
UK Manufacturing PMI
 Source: Bloomberg, Angel Research
 
Exhibit 5:
 
Germany Manufacturing PMI
 Source: Bloomberg, Angel Research
Exhibit 6:
 
Baltic Dry Index 
 Source: Bloomberg, Angel Research
 
49.249.449.649.850.050.250.450.650.851.051.2
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   S  e  p -   1   2   O  c   t -   1   2   N  o  v -   1   2   D  e  c -   1   2   J  a  n -   1   3   F  e   b -   1   3   M  a  r -   1   3   A  p  r -   1   3   M  a  y -   1   3   J  u  n -   1   3   J  u   l -   1   3   A  u  g -   1   3
 
 
Metals |
 
Sector update
September 13, 2013
 3
Steel companies – Outlook 
Iron ore prices have risen while coking coal prices have declined
Globally, sea-borne iron ore prices have increased from June 2013. The currentiron ore prices are in the range of US$130-140/tonne. Going forward, we do notexpect significant decline in iron ore prices as current iron ore prices are just abovemarginal cost of production from Chinese miners. However, we do not expect any meaningful rise in iron ore prices considering anticipated increases in supplies by three global iron ore giants, Rio Tinto, BHP Billiton and Vale.Domestic iron ore prices have also come off sharply over the past three quarters dueto sluggish steel demand in India. Nevertheless, we do not expect iron ore prices toslide meaningfully from the current levels given that steel prices have risen fromSeptember 2013.Contracted coking coal prices (a key imported raw material) have declined steeply over the past two years. A decline in coking coal prices is expected to benefitIndian steelmakers
 
during FY2014; however, it will be partially offset by INR depreciation against the USD
.
Exhibit 7:
 
Global Iron ore prices have risen recently..
 Source: Bloomberg, Angel Research
Exhibit 8:
 
..while coking coal prices continued to slide
 Source: Industry sources, Angel Research
 
Domestic steel demand remains weak…
Overcapacity in the steel industry, slowing global demand, and falling coking coalprices have resulted in a decline in steel prices globally until May 2013, post whichsteel prices have increased modestly across regions. Domestic steel pricescontinued to decline until August 2013 due to subdued demand in the country.Steel consumption growth declined to multi-year lows to 3.3% yoy during FY2013.Further, real consumption in India rose by just 0.3% yoy during April – August2013 due to low demand from construction and automotive sectors.
8595105115125135145155165
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Iron ore fines CFR 63.5% Fe
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Hard coking coal price

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