A sharp decline in global prices of base metals since April may hit the margins of domestic producers, given the import-parity pricing they follow, but will let user industries, including auto and white goods makers, cut input costs and pass on the gains wholly or partly to consumers. However, the fall of the rupee against the US dollar could inflate import costs, to some extent retaining the pricing power of domestic metal companies, particularly steel makers.
In the Indian markets, after two years of dream run, metal stocks have started to lose steam. While the stocks of both ferrous and non-ferrous metal companies have declined by up to 25% in the last one month on the BSE, the chances of them rallying again in the near term are not very bright as supplies are outweighing the demand across the globe, including in India.
Between March 31 and May 12, aluminium prices have fallen by 21% in the LME, copper by 10%, zinc by 13% and steel hot-rolled coil (HRC) by 11%. The decline has impacted the earnings of the Indian firms and the market sentiments. In the one month till May 12, Tata Steel stocks were down by 15%, JSPL 17%, Hindustan Copper 24%, Hindustan Zinc 19%.
“Demand for metals is strongly correlated with the performance of underlying economies. With rising inflation, central banks around the world are increasing interest rates with an objective of slowing down their economic growth rates, which in turn is likely to adversely impact metal demand going forward,” said Jayanta Roy, senior vice president and group head-corporate sector rating at Icra.
Moreover, the sharp increase in metal prices following the outbreak of Russia-Ukraine crisis could not be absorbed by the market. These factors have led to a correction in metal prices, especially for steel and aluminium, he said.
The fall in metal demand is led by a deceleration of China’s economy, the biggest consumer and producer of all major metals, due to strict Covid curbs. The Eurozone is also facing the heat of the Russia-Ukraine war and the monetary tightening by the central bank to control all-time high prices for goods and services. The US is also battling a near 40-year high inflation which may prompt the Fed to raise rates further.
Hetal Gandhi, director at Crisil Research, said, “Prices, both global and domestic, across most base metals have corrected from March-April peaks with corrections being sharper in the non-ferrous space.”
On the ferrous side, however, while global prices have seen sharp corrections, especially in Europe and US, domestic prices had largely remained resilient for a while. Domestic prices witnessed a rally over March and April on the back of better export prospects as well as elevated input costs, especially coking coal.
However, as global steel prices cooled in Europe and the US by over 50% and 25% respectively from March peaks, domestic steel prices too began to waver. “With exports to Europe and North America no longer that lucrative, domestic mills have corrected prices (by Rs 2,500/tonne or 3%) in early May and the trend is likely to continue going forward,” Gandhi said.
“Steel prices, which have been on a song for the past two years, are finally set to correct on weak seasonality, and may trade at around Rs 60,000 per tonne by the end of the current fiscal year, down from the Rs 76,000 per tonne peak it scaled last month”, Crisil wrote recently.
VR Sharma, managing director, Jindal Steel and Power (JSP), however, said steel demand and prices are “stable.” Until and unless input costs come down, the steel prices are unlikely to fall, he said, adding that prices are likely to go up next month. JSP’s stock price tumbled by nearly 17% in the last one month.
Domestic aluminium industry is also expecting a stable price for aluminium on the LME in the near-term. “Demand is expected to increase after China lifts the lock-down,” said an executive from a private firm, asking not to be identified.
The resilience of the zinc price in the face of concerns over demand reflects the robust fundamentals of the metal and the tightness in the refined market which has little chance of easing in the immediate future, he added. “We don’t expect zinc prices to soften anytime soon.”
The user industries are not unanimous on if they would witness a fall in input costs and whether these could be passed on.
A Maruti spokesperson said: The current market situation is very volatile and it is too early for us to give any guidance on the impact of metal prices going down. We will analyse the situation and will take appropriate action.”
Kamal Nandi, business head and executive vice president at Godrej Appliances, part of Godrej & Boyce, said: “The impact of Russia-Ukraine crisis and the pandemic in China has lead to 2-4% rise across all product categories in the consumer durables segment in April. While companies have been absorbing a large share of the input cost increase, it has not been completely passed on to consumers yet.”
Nandi said, for the current quarter, the fall in prices of nonferrous metal will reduce input cost pressure only to an extent going forward since prices of all other commodities used to produce appliances continue to be at elevated levels.
Pradeep Bakshi, managing director & CEO at Voltas Ltd, said, “”Metals like copper, aluminium and steel form a substantial part of the input cost of products like air conditioners. Any price movements of these metals will affect our bill of materials and has an impact on the overall cost of airconditiners. We have seen the prices softening in recent times and this will definitely benefit the industry in terms of reduced input costs”
However, according to Kuldeepak Virmani, director & senior vice-president at Daikin India, although copper prices have declined globally, it will not benefit India’s air-conditioner makers as all the companies import good quality copper from overseas and the costs of imported copper have increased due to a weakening rupee against the US dollar.
“In fact, AC makers will have to go for another round of price hike in the 3-5% range in June-July to offset rising input costs due to sharp rupee depreciation and additional costs associated with new energy label star rating from July 1 onwards,” he said.
For new star ratings, AC makers’ costs are likely to increase by 3-5% on an average, depending on models, as the new units will have better efficient compressors and bigger components. Since compressors are also being imported, the rupee’s fall make them costlier.
Indian AC manufacturers sourceg copper from China, Vietnam or Malaysia, while compressors are being imported from China and Thailand. “There is a temporary disruption of supply chains following Shanghai lockdown due to Covid,” Virmani said.