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Metals pulse (September 2019) - Domestic steel prices bottoming out

China PMI index remained in the contractionary zone for the 5th consecutive month in Sep 2019, however improved to 49.8 (49.5 in Aug). US-China trade talks are set to begin again from 10th Oct onwards.

Ferrous: Steel prices decline further in India, but marginally stable in China

Weakness in global steel prices persists: Steel prices in the US-EU continued to decline in Sep. However, China HRC domestic prices remained relatively stable. While average China domestic HRC prices fell ~2% mom to US$522/t (1% in CNY terms), export prices slid by US$10/t (~2%) to US$480/t. China’s net steel exports declined 16% yoy to 4.0mt despite steel production growing at 9.3% yoy to 87.2mt. HRC prices in Europe declined by 2% mom to US$511/t in Sep whereas the same fell 8% mom in the US to US$555/t in Sep-end.

Domestic steel prices correct further in Sep on weak demand, expect prices to bottom out: Weak steel demand pushed HRC prices in traders market to a 36-month low in Sep, as prices corrected by Rs2,000/t to Rs34,750/t in Sep end. Similarly, primary producers rebar prices too fell by Rs1,600/t to Rs34,400/t. Domestic prices are trading at ~3% discount to landed cost of imports from FTA countries like Korea. With expectation of improvement in domestic demand, particularly from infra and construction sector, towards Oct end onwards, we expect steel producers to hold prices in Oct. Large inventory build up with producers and large dealers could check immediate price increase in case of demand improvement.

NMDC cuts iron ore prices in Sep, global iron ore prices improve: Global iron ore prices recovered in Sep after a sharp decline in the previous month. 62% Fe iron ore recovered to US$93/t levels from US$85/t levels in Aug end and averaged US$93/t, flat mom. Lower steel prices prompted NMDC to further cut iron ore prices by Rs200/t during Sep. Higher exports from Odisha helped prices to remain stable there.

Coking coal prices decline to 3-year lows, to aid margins of steel producers: Decline in coking coal prices to 3-year lows to US$140/t in Sep end (down by ~US$65/t versus Mar end) will aid margins of steel producers producing through BF-route, even if steel prices remain subdued.

Government looking to enable uninterrupted iron ore supply in the event of disruption: In Sep, the government allowed SAIL to liquidate its iron ore inventory of ~70mt. Further, it allowed SAIL to sell ~25% of its mining production to make up for the lost supply, in case of delays in mine auctions. Further, Odisha government has let miners store iron ore inventory outside lease areas enabling miners to supply beyond expiry period. Though SAIL will not be able to bridge the gap but Govt is trying to minimise the production disruption. We expect iron ore mining lease auction process to start in Oct 2019.

Non-ferrous: Aluminium inventories at 11-year low, trade uncertainties restrict price increase

Aluminium: Average aluminium prices rose 1% mom to US$1,782/t (CMP: US$1,734/t) in Sep 2019. Global aluminum inventories at exchanges (LME+SHFE) have hit fresh 11-year lows at 1.23mt. Aluminum production declined 1.4% 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. 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. 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$294/t was down ~2% mom.

Zinc: Zinc prices averaged 1% mom higher to US$2,309/t during Sep 2019 from an average US$2,279/t in Aug 2019. A consumption demand of 7.86mt (up 1.2% yoy) against metal production of 7.75mt (up 2.0% yoy) has led zinc to record a deficit of 106,000 tonnes during 7MCY19. 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$2,298/t).

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