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Metals pulse (April 2019) - Awaiting demand improvement; stock valuation multiples at the lower end

China PMI index continues to be in the expansionary zone for the 2^nd consecutive month in Apr-19 (50.1), indicating improving demand in China. All eyes on US-China trade talks beginning 30 April, 2019.

Ferrous: Steel prices rise on cost push - demand improvement awaited

Steel prices rise in China, domestic producers trying to hold prices, and await election outcome: Globally, cost push led average HRC prices in China increasing by 3% mom in Apr 2019. However, China’s net steel exports increased 23% yoy (5.4mt) amidst ~10.0% yoy growth in production (80.3mt) during Mar 2019, which could be a cause of concern for prices globally, if the trend continues.

Domestic steel prices remained largely flat mom in Apr 2019 on low demand and surging imports. Domestic steel demand fell in Apr 2019, as consumers replenished inventories in Mar 2019. Moreover, continuing slowdown in demand from the auto sector and ongoing general elections has delayed demand from the infra sector. Also, domestic producers face import threats from countries with whom India has free trade agreements (FTA). Currently, domestic HRC prices are at ~6% discount to landed cost of imports from China and at ~2% premium over imports from FTA countries like Korea, which is keeping domestic prices under check. Moreover, a depreciating Rupee against the USD could cause the widening discount on Chinese imports to rise. As a result, we expect domestic steel prices to remain stable in May 2019.

Dichotomy between global and domestic iron ore prices: Post VALE’s dam collapse in Jan 2019, global iron ore prices continued to rise (up 23% to US$94/t from Jan 2019 average) but domestic iron ore prices remained subdued. In the domestic market, only Odisha miners changed iron ore prices frequently, as most of their mines will be auctioned by Mar 2020. This led NMDC not to take any benefits of rising global prices (NMDC fines prices up 2% from Jan 2019 average). NMDC’s prices are at a discount of 28 % from landed cost of imports at East Coast. We expect higher global prices to enhance iron ore exports from Odisha, which in turn would balance the domestic demand-supply situation and subsequently cause domestic prices to rise.

Non-ferrous: expect aluminium price to rise but zinc expected to fall

Aluminum: Average LME aluminum prices fell 1.5% mom to US$1,873/t in Apr 2019. During Jan-Mar 2019, global production slid 0.2% yoy to 15.64mt, with aluminum inventories at exchanges (LME+SHFE) now at a multi-year lows. The global aluminum market is expected to remain in deficit of 1.5-1.7mt in CY19E. Lower production and falling inventories bode well for aluminum prices (CMP – US$1,815/t). We expect aluminium prices to rise and average at US$2,000/t in FY20E.

Zinc: Average Zinc prices were up 1.3% mom at US$2,853/t during Apr 2019 from an average of US$2,811/t in Mar 2019. Slow consumption demand resulted in Zinc recording a surplus of 63,000 tonnes, despite 3% fall in metal production during Jan-Feb 2019. ILZSG expects the global zinc market to face a deficit of 72,000 tonnes in CY19E, much lower than 384,000 tonnes in CY18. We expect zinc prices to taper from current levels H2CY19 onwards, as we expect zinc supply is likely to improve. We expect zinc prices to average US$,2500/t in FY20E.

Top Picks: Hindalco, NMDC, Tata Steel & JSPL