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Metals pulse (June 2019) - Will domestic steel industry get further protection?; unlikely in our view

China PMI index remained in the contractionary zone in Jun 2019 (49.4), with no improvement, indicating  slowdown in demand in China. US-China trade talks have re-started and US has refrained from imposition of further tariffs on China which is  a breather for metals. The domestic steel industry is urging the government to impose 25% safeguard duties to restrict imports at a lower price from free trade agreement (FTA) countries, which is unlikely, in our view.

Ferrous: Global steel prices under pressure but near to bottom

Global steel prices on a decline: Despite the pressure on costs, steel prices slid in Jun 2019, due to subdued demand. China domestic HRC prices saw a sharp rebound in Jun end, after having declined to US$550/t and stood at US$569/t, down ~2% mom at Jun end. China’s net steel exports declined 11% mom (17% yoy) to 4.8mt amidst ~10% yoy growth in production (89.1mt) during May 2019, indicating firm demand in China until May. However, rising production in China amid contractionary PMI is a concern for prices globally.

Domestic steel prices under pressure in Jun 2019 on lower demand and cheap import offers: Domestic steel demand remained subdued in Jun 2019 on weak demand from the construction and auto segments, amid liquidity constraints. Declining import offers amidst slow demand has kept domestic prices under pressure. In light of recently booked offers from FTA countries like Korea and Japan, at landed cost of ~Rs38,500/t (delivery in Jul-Aug 2019), we see the likelihood of domestic producers reducing prices (CMP: Rs40,000-41,500/t) by Rs1,000-2,000/t during July-August on lacklustre demand amid monsoon.

Safeguard duty, as demanded by the domestic steel Industry, looks unlikely: Akin to protectionist measures imposed in major economies globally, Indian steel industry too is pushing for protection measures (imposition of safeguard duties or increase in import duty from 12.5% to 15%) 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 are not alarming yet; moreover, government’s priority is to improve domestic demand.

Domestic iron ore prices stable in Jun, thanks to surging exports: Domestic iron ore prices have been stable in Jun, post hikes by domestic miners in May. We believe exports from Odisha miners will continue to rise, supported by higher global prices and higher demand from China. This in turn will balance the domestic demand-supply situation and support prices.

Non-ferrous: Alumina prices tumble further; aluminum to hold before rising in H2FY20E; zinc to stabilise

Aluminum: Average LME aluminum prices fell ~2% mom to US$1,780/t in Jun 2019. During Jan-May 2019, global production slid 0.1% yoy to 26.4mt, with aluminum inventories at exchanges (LME+SHFE) remaining low (1.43mt) – the lowest in 10 years. 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$1,804/t). We expect aluminum prices to rise in H2FY20E and average ~US$2,000/t in 2HFY20E. Current alumina price at US$341/t was down ~5% mom. Fall in alumina prices should provide some respite to marginal aluminum producers, as ~50% of capacities outside and ~20% of capacities in China are estimated to have operated at losses in May.

Zinc: Average zinc prices slid 5% mom to US$2,484/t during Jun 2019 from an average US$2,615/t in May 2019, as inventories in exchanges recovered during the month (185kt). Improved consumption demand in Apr 2019 led zinc to record a deficit of 97,000 tonnes during Jan-Apr 2019, supported by 2.3% fall in metal production. ILZSG estimates a deficit of 121,000 tonnes in the global zinc market in CY19E, much lower than 384,000 tonnes recorded in CY18. We expect zinc prices to average US$2,600/t in FY20E (CMP – US$2,472/t).

Top Picks: Hindalco, NMDC, Tata Steel & JSPL