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Metals pulse (August 2019) - Awaiting domestic demand improvement post monsoon

China PMI index remained in the contractionary zone for the 4^th consecutive month in Aug 2019 (49.5). The US-China trade war escalated further during August. China announced import tariffs of 5%-10% on US$75bn worth of US goods, in retaliation to the 10% import tariff imposed by the US earlier this month on US$300bn worth of Chinese goods, effective 1 Sep 2019. The two sides will continue talks in Sep 2019. Domestically, DGTR has refused to provide any safeguard measures for the steel industry against industry’s demand for safeguard duty of 25%.

Ferrous: Global steel prices decline in Aug 2019

Global steel prices decline: Global steel prices, which seemed to have stabilised in Jul, fell in Aug. China HRC domestic prices slipped 8% mom to US$514/t (3% in local currency and 5% due to currency depreciation). On the other hand, China HRC export prices declined by US$30/t (~6%) to US$490/t from Jul end, primarily due to currency depreciation. China’s net steel exports declined 3% yoy to 4.7mt, whereas steel production growth slowed from 9.9% yoy in H1CY19 to 5% yoy (85mt) in Jul 2019. HRC prices in Europe declined by 2% mom to US$521/t in Aug.

Domestic steel prices correct further in Aug on weak demand: Weak demand for steel in Aug led steel producers to lower offers. HRC prices in trader’s market fell by Rs1,500/t mom in Aug-end to Rs.36,750/t whereas primary rebar prices too declined by Rs1,600/t mom to Rs35,600/t. We believe HRC prices could slip further by upto Rs1,000/t in Sep to Rs35,750/t (US$496/t), if demand fails to restore. Similarly, rebar prices could also remain weak in Sep 2019 until construction activities pick up post monsoon or cash liquidity improves.

Domestic iron ore miners cut prices in Aug, global iron ore prices decline sharply: Global iron ore prices declined sharply in Aug from their 5-year peak levels. 62% Fe iron ore fell to US$85/t, from US$118/t in Jul-end, on weakening demand and increasing iron ore supply. Weak steel prices led NMDC to cut prices by Rs200/t for lumps and fines each, whereas Essel mining cut prices by Rs150/t and Rs200/t for lumps and fines, respectively. Lower global iron ore prices are likely to lower exports from Odisha miners and thus, keep a check on domestic iron ore prices.

Embargo on NMDC’s Donimalai iron ore lease, no risk to lease renewal for Coal India mines: With the Karnataka government cancelling NMDC’s lease for the Donimalai mine, we remain cautious on the lease renewals of other NMDC mines and await further developments on the Donimalai mine case. The outcome of Donimalai mine will set the precedent for merchant mining operations in India. However, we see do not see a risk to lease renewals of COAL India’s coal mines.

Non-ferrous: Aluminum to hold before rising in H2FY20E; zinc to stabilise

Aluminium: Average aluminium prices declined 2% mom to US$1,774/t (CMP: US$1,743/t) in Aug 2019. Global aluminum inventories at exchanges (LME+SHFE) have hit 11-year lows at 1.30mt. Aluminum production declined 1.3% yoy in Aug 2019 to 5.4mt. As per Rusal, global primary aluminum market remained in deficit of 1.1mt in H1CY19. Recently, global aluminum producers trimmed CY19 aluminum demand growth forecast by 100bps; however, demand growth forecast remain above 1% for CY19 against a demand growth of ~0.5% in H1CY19 suggest expected improvement in H2CY19 demand. Global aluminum market is expected to remain in deficit of 1.0-1.5mt in CY19E. Approximately 12% of smelter capacities outside China operate at cash loss despite lower alumina and coal prices in Aug 2019, as per Rusal. Lower production and falling inventories bode well for aluminum prices, amid a weak demand environment (CMP – US$1,743/t). We expect aluminum prices to rise in H2FY20E and average ~US$1,900/t in FY20E, however trade uncertainties could impact aluminum demand adversely, thereby, impacting prices. Current alumina price at US$299/t was down ~2% mom.

Zinc: Average zinc prices slid 6% mom to US$2,281/t during Aug 2019 from an average US$2,432/t in Jul 2019. Falling metal production (6.51mt, down 0.4% yoy) and increasing consumption demand (6.65mt, up 0.2% yoy) led zinc to record a deficit of 134,000 tonnes during H1CY19. ILZSG estimates a deficit of 121,000 tonnes in global zinc market in CY19E, much lower than 507,000 tonnes recorded in CY18. We expect zinc prices to average US$2,580/t in FY20E (CMP – US$2,275/t).

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