Ban on iron ore exports and denial of transport licences by the Karnataka government, lower demand due to monsoons and company-specific events stifled the metals industry during the second quarter of FY2011.
However, Chinese steel production cuts and removal of export rebates restricted further price fall for the steel industry.
On a positive note, steel companies in September 2010 increased flat product prices by Rs1,000 per tonne, with more price hikes on the anvil.
Experts believe steel volumes by key Indian steel producers are expected to increase 6.3% year-on-year (y-o-y) during the second quarter. According to a Motilal Oswal report, Tata Steel improved sales volumes consistently since April and is expected to post volumes of 1.63 million tonnes (mt) in 2QFY11. ?JSW Steel (1.2mt) and SAIL (2.3mt) suffered the most in 1QFY11 due to subdued demand and higher imports. We expect 2QFY11 sales of 1.6mt (up 10% YoY) for JSW and 3.1mt (up 3% YoY) for SAIL,? said Sanjay Jain analyst with Motilal Oswal in his report.
Price increases in early September are expected to minimise the quarter-on-quarter (QoQ) fall in average realisations for these players. However, IDFC Securities report believes cost pressures in terms of raw materials is expected to negatively impact Ebidta per tonne for steel companies during the quarter. The sharp hike in contract prices of iron ore and coking coal taken at the beginning of the year would reflect fully in earnings from 2QFY11. According to an IIFL report, the effect of price hikes was relatively modest in 1QFY11, depending on integration levels. This, coupled with lower realisations, would translate to a fall in EBITDA margins and EBITDA/tonne, which likely peaked for the year in 1QFY11.
On the non-ferrous front, average 2QFY11 non-ferrous metal prices are largely sequentially flat and volume growth is expected to be positive. ?Higher volume growth and stable metal prices will result in a sequential rise in revenues for most non ferrous companies. However, a rise in fuel cost and other expenditure will partially affect operating margins,? said IDFC Securities report.
Metal prices on the LME were weak since the beginning of the quarter on account of policy tightening measures initiated in China and concerns over demand due to debt problems in the Euro zone and slowing economic activity in the US. However, in September 2010, sentiment improved slightly with a firming trend after a weak dollar raised commodities appeal as an alternative investment. During the quarter, the average LME prices of aluminium, alumina and zinc fell 0.1%, 5.3%, and 0.2% respectively, while copper and lead prices were up 3.6% and 4.8% on quarter-on-quarter basis, respectively. As a result, margins of non-ferrous companies will be mixed. ?Hindustan Zinc’s margins will improve as benefits of expanded capacity are expected to flow in 2QFY11.