Zinc volumes likely to aid Vedanta; a steady Q3 for Hindalco; lower alumina prices to hit Nalco showing.
Lower steel prices and higher coking coal costs will result in 17-19% q-o-q decline in Ebitda/ton for steel companies in Q3FY19. Among non-ferrous producers, we expect only Vedanta to report sequential increase in Ebitda aided by higher zinc volumes from ramp-up of mining projects. We expect a steady quarter for HNDL but a sequential decline for NACL due to lower alumina prices. We prefer HNDL (BUY), VEDL (BUY) and NACL (BUY).
Steel—lower prices, higher coking coal costs to hurt margins China steel prices (HRC export) declined by 11% q-o-q to $516/ton in Q3FY19. Lower China export prices led to a sharp fall in steel prices across regions including India. Indian steel prices declined mostly in December, 2018, which contained the extent of price decline to
1-3% q-o-q (on average) for Q3FY19—we also note that companies were offering discounts in December even if the list prices were higher due to lower global prices. Raw material costs for domestic steel producers will be higher due to 19% q-o-q increase in coking coal price to $220/ton. We expect Ebitda/ton for domestic steel producers to decline by 17-19% q-o-q due to price-cost effect.
Domestic steel demand increased by 8% y-o-y to 63.6 mn ton for April-November 2018 while production increased by 6% y-o-y to 64.7 mt. Steel exports from India remained weak due to sharp fall in global prices—exports declined 39% y-o-y to 4.1 mt for April-November 2018. We also note increase in inventory levels at domestic steel mills/supply chain due to lower steel exports during the quarter.
Non-ferrous—higher zinc volumes to aid Vedanta; a steady Q3 for Hindalco All-in aluminum prices declined 5% q-o-q to $2,070/ton while zinc prices increased 4% q-o-q to $2,630/ton in Q3FY19. While alumina prices declined 17% q-o-q to $446/ton, we expect operating margins of non-integrated aluminum producers to be lower due to high cost inventories. We expect Hindustan Zinc’s Ebitda to increase by 23% q-o-q to `28.7 bn aided by higher mined metal volumes (+10% q-o-q) and increase in zinc prices. Vedanta’s Ebitda will increase 14% q-o-q to Rs 59.1 bn largely aided by higher zinc Ebitda; we expect aluminum profitability to further decline due to lower aluminum prices and high alumina costs during the quarter. Hindalco’s standalone Ebitda (including Utkal) will increase by 6% q-o-q to Rs 18.2 bn (+16% y-o-y) aided by higher Ebitda from copper operations. We estimate Nalco’s Ebitda to decline by 27% q-o-q to Rs 6.2 bn due to lower alumina and aluminum realisations.