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Metals pulse (May 2019) - Worsening of trade war, China PMI contraction elevates demand growth risk

China PMI index slips into contractionary zone in May-19 (49.4) after remaining in expansionary zone for 2 months, indicating slowing demand in China. US-China trade talks in doldrums; next meeting could be on 28th-29th June at G-20 meeting in Osaka, Japan.

Ferrous: Global Steel prices under pressure

Global steel producers’ margins under pressure: During May 2019, steel prices declined across the globe despite pressure on cost side, indicating slowing demand. HRC prices in China stood firm in early May but declined by 4.5% mom to US569/t (~2% in CNY terms) by May end. China’s net steel exports declined 2% mom (2% yoy) at 5.3mt amidst ~12.7% yoy growth in production (85.0mt) during Apr 2019 indicating stable demand in China till April. However, rising production in China amid contractionary PMI is a concern for prices globally.

In US, removal of tariffs on steel imports from Canada and Mexico led to 19% mom decline in HRC prices to US$585/t and subdued demand in Europe led HRC prices in EU declined by 5% mom to US$519/t, lowest since Oct-16. This even forces Arcelor Mittal to scale down production by ~4.5mtpa (~10% of Arcelor’s EU production).

Domestic steel prices declines mom in May 2019 on low demand and lower global prices: Domestic steel demand remain muted in May 2019, due to slower demand growth in Auto and demand postponement in infra amid general elections during the month. Declining import offers amidst slow demand kept domestic prices under pressure. Domestic producers will try to increase prices by ~Rs500/t in June to offset part of hike in iron ore prices but it would be difficult for the market to absorb the hike. Currently, domestic HRC prices are at ~5% discount to landed cost of imports from China but at ~7% premium over imports from FTA countries like Korea. Domestic industry is requesting the government to impose safeguard duties so as to restrict imports at a lower price from FTA countries.

Uptick in domestic iron ore prices; thanks to increasing exports: Despite ~39% rise in iron ore prices (62% Fe) to US$104/t from Jan 2019 average, domestic iron ore prices have remained subdued. However, recently NMDC took price hike of Rs250/t in May-end. As a result, NMDC prices are up by Rs200-300/t (7-12%) from Jan-end. We expect Odisha miners to continue higher exports supported by higher global prices and higher demand form China, which in turn would balance the domestic demand-supply situation and subsequently support prices.

Non-ferrous: expect alumina prices to fall further; aluminium to hold before rising in 2HFY20; zinc to stabilise

Aluminum: Average LME aluminum prices fell 3% mom to US$1,807/t in May 2019. During Jan-Apr 2019, global production slid 0.7% yoy to 20.8mt, with aluminum inventories at exchanges (LME+SHFE) remain low (1.67mt). According to Rusal (post result presentation on 14 May 2019), ~50% smelters outside China and 20% smelters in China are making losses at current prices. 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$1,787/t). We expect aluminium prices to rise in H2FY20 and average ~US$2,000/t in FY20E. Current alumina prices stand at US$361/t. We expect it to fall further in Q2FY20 with resumption of Alunorte’s alumina refinery (from 50% CU to 75-85% in next two months), providing support to margins of non-integrated players.

Zinc: Average Zinc prices slid 8% mom at US$2,624/t during May 2019 from an average of US$2,846/t in Apr 2019 as inventories in LME recovered during the month (160kt). Improved consumption demand in Mar 19 led Zinc to record a deficit of 15,000 tonnes during 1QCY19, supported by 3% fall in metal production. ILZSG expects the global zinc market to be in deficit of 121,000 tonnes in CY19E, much lower than 384,000 tonnes in CY18. We expect zinc prices to average US$2,600/t in FY20E (CMP – US$2,548/t).

Top Picks: Hindalco, NMDC, Tata Steel & JSPL