The Hindu Business Line : Analysts bullish on steel, non-ferrous metals

Steel and non-ferrous metal industries are expected to tread on a robust growth path helped by higher metal prices amidst strong demand from user industries.

Most companies in these industries are expected to report moderate to good earnings numbers during the June 2006 quarter as well as going forward, analysts said.

But rising input costs could be a worrying factor as crude oil prices went passed $78 a barrel.

Robust outlook

"A robust outlook for the end user industries such as automobile, consumer durables, construction, power and packaging and an estimated GDP growth of 7-8 per cent will ensure that demand for steel, aluminium and copper in the domestic market continue to remain buoyant," said analyst, Mr Hitesh Agrawal of Angel Broking.

According to him, favourable demand-supply balance, low global metal inventories coupled with firm raw material prices should also help sustain metal prices over the next 2-3 quarters.

Despite higher production, rising steel prices were supported by the continued strong global demand for the metal, especially from China.

Steel prices up

Global steel prices have been moving up in the last quarter of 2005/2006 and continued this trend into the first quarter of the current fiscal. Steel companies have marked up their steel product prices in line with the increase in the landed cost of steel imports. This increase in the steel prices came despite China, the key determinant of the global commodity prices since the last couple of years, increasing its steel production by 20 per cent year on year during the June quarter.

Indian companies were prompted to hike prices as input costs of zinc and iron ore were on an upward surge. But strong demand helped them to pass on cost increases.

Arcelor effect

Industry sources also said that the steel industry's biggest takeover (Mittal-Arcelor) would have a sobering effect on volatile steel prices. Steel has been amongst the few commodities that have bucked the carnage witnessed in the global metal prices during the quarter.

The June quarter has seen strong volume growth for steel companies.

There could be a slight dip in demand for long products during the September quarter as construction activity slows down on account of the monsoon season.

Forecasts

According to DSP Merrill Lynch, SAIL would show improvement on the back of higher steel prices but profits would fall by 13 per cent. Tata Steel is likely to show an improvement in profit margins over the March quarter but profits would decline because of higher depreciation and input costs.

Wild swings in non-metals

The non-ferrous metals segment, according to analysts, witnessed wild swings during the quarter. Aluminium and copper prices rose by about 30 per cent and 59 per cent respectively, until mid-May from their March end levels. But in May, they declined by around 25 per cent before stabilising.

Despite the sharp fall in metal prices in May, the average prices of aluminium, alumina and copper were higher by 48 per cent, 39 per cent and 114 per cent respectively at the end of the June 2006 quarter. Analysts say this would help non-ferrous metal companies report robust performance during the first quarter of the current fiscal.

DSP Merrill Lynch's forecast for the metal sector points out that non-ferrous metals would clearly outperform steel.

"Aluminium should excite with a sharp rise in sales and profit numbers, whereas steel is expected to continue to disappoint despite showing improvement on a QoQ basis. In aggregate on a YoY basis, we expect sector profit to rise by 21 per cent led by 124 per cent jump in non-ferrous metals profit," DSP Merrill said.

Analysts remain very bullish on Nalco and Hindalco, with June being pegged as the best ever quarter for the two companies.

The stock of Nalco ruled steady at Rs 220.05, while Hindalco ended almost 4 per cent weak at Rs 174.90, on the BSE. SAIL closed at Rs 74.35, down 2 per cent on the BSE while Tata Steel closed at Rs 510.70 down 1.71 per cent.