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Metals pulse (July 2019) - Subdued domestic demand amid liquidity crisis

China PMI index remained in the contractionary zone in Jul 2019 (49.7), indicating slowdown in demand in China. US-China trade talks resumed from 30 July 2019 but ended again with no results. Though few of domestic steel producers have started making losses amid lower steel prices, the 13% yoy fall in imports in Q1FY20 do not support industry’s arguments for protection from imports.

Ferrous: Global steel prices recovered marginally in Jul

Global steel prices stabilise: Global steel prices after falling from April 2019 stabilised in Jul 2019. China HRC domestic prices after reaching lows of ~US$550/t in mid-June, started recovering and is trading at ~US$562/t in Jul end. Average domestic China prices stood 1% higher mom at US$566/t. China’s net steel exports declined 8% mom (down 26% yoy) to 4.4mt, despite ~10% yoy growth in production (87.5mt) in Jun 2019. However, rising production in China amid contractionary PMI is a concern for prices globally.

Domestic steel prices corrected sharply - at 20-month low: Our channel check suggests that domestic steel demand remains subdued in Jul 2019, as weak demand from construction and auto segments continued amid liquidity constraints. HRC prices in traders market corrected by Rs1,750/t during Jul, whereas rebar prices declined by Rs3,000/t and trade at 20-month low of Rs38,250/t and Rs37,200/t, respectively. Domestic HRC prices currently trade at par with landed cost of imports from Korea. Domestic prices may fall further by Rs500-1000/t in August.

Safeguard duty, as demanded by the domestic steel Industry, looks unlikely in near term: Akin to protectionist measures imposed in major economies globally, Indian steel industry too is pushing for protection measures (imposition of safeguard duties) to restrict imports, especially from FTA countries. We believe the Indian government is unlikely to provide further protection in the near term, as overall steel imports (down 13% yoy) are not alarming yet. However, if steel prices do not improve and companies started making losses, there exist a possibility of some kind of protection provided by the government later.

Domestic iron ore prices stable in Jul, may see marginal cut in August: Domestic iron ore prices remained unchanged in Jul. We believe exports from Odisha miners will continue to remain high, supported by higher global prices and increased demand from China. This will balance the domestic demand-supply situation and support prices. However, with lower steel prices, there remains a possibility of marginal cut in iron ore prices in August.

Non-ferrous: Alumina prices decline on increased supply; aluminum to hold before rising in H2FY20E; zinc to stabilise

Aluminum: Average LME aluminum prices increased ~2% mom to US$1,817/t in Jul 2019. During H1CY19, global production slid 0.5% yoy to 31.6mt, with aluminum inventories at exchanges (LME+SHFE) are close to 10-year low at 1.42mt. Global aluminum market is expected to remain in deficit of 1.0-1.5mt in CY19E. Recently, global aluminum producers trimmed CY19 aluminum demand forecast by 100bps; however, demand growth forecast of above 1% for CY19 against a ~0.5% demand growth in H1CY19 suggest expectation of improvement in demand in H2CY19. Lower production and falling inventories bode well for aluminum prices amid weak demand environment (CMP – US$1,807/t). We expect aluminum prices to rise in H2FY20E and average ~US$1,900/t in FY20E. Current alumina price at US$305/t was down ~11% mom. Fall in alumina prices will provide a respite to marginal aluminium producers.

Zinc: Average zinc prices slid 2% mom to US$2,431/t during Jul 2019 from an average US$2,484/t in Jun 2019. Falling metal production (5.39mt, down 1% yoy) and lower consumption demand (5.51mt, down 0.6% yoy) have led zinc to record a deficit of 123,000 tonnes during Jan-May 2019. ILZSG estimates a deficit of 121,000 tonnes in the 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$2,459/t).

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