Price hikes and rising demand make a good therapy for metals stocks


MUMBAI: For metal companies, things are gradually changing for the better. Demand has begun to inch up, allowing companies to raise prices. The Nifty Metal index, which has largely underperformed this year, has gained nearly 6% so far in August.

One of the major issues for metals companies have been a fall in demand in the domestic market due to the lockdown. Lower demand and lower prices tend to hit operating leverage hard, and some companies in fact recorded steep losses in Q1. Of course, costs savings cushioned the hit.

Also, rising exports have kept domestic supplies in check and global prices have been been climbing. Some of that has naturally rubbed off on India as well.

Domestic steel companies recently raised prices by 500-1,000 per tonne, following a price hike in July. This shows their increasing ability to pass on rising prices even in a slow-moving market. Nevertheless, the recent increase only pushes up price levels to what they were three months ago. “It is interesting to note that in the past three months, while prices across regions (except US) have increased 20% on average, domestic prices have stayed flat,” said analysts at Edelweiss Securities in a note to clients.

Signs of rising demand have been lending support. Domestic consumption was up 11% month-on-month in July, pointed out analysts. This is far from the average, though. Steel consumption is still about 31% lower than year-ago levels.

But the latest price hikes would aid margins in the coming quarters. The impact could be substantial in the coming quarters if companies can sustain some of the cost-cuts done in the first quarter.

Besides, input costs could add to the leverage. Already, coking coal prices are lower and have been stable. Even as domestic iron ore prices have risen 20% in the past two months, they are still much lower than international prices. Indeed, this will bolster domestic margins. Additionally, export realizations have also perked up.

That could have a sizeable impact on margins in the second quarter. “We see a sharp V-shaped margin recovery in 2QFY21 led by higher prices, on higher domestic and export realization, lower exports and higher domestic sales and cost tailwinds from coking coal and operating leverage,” said analysts at Kotak Institutional Equities in a note to clients.

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