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TREND: Steel cos to sustain strong show, non-ferrous peers may lag

Tuesday, Nov 20

    By Nikita Periwal
    MUMBAI – The strong growth in the earnings of steel producers in India in Apr-Sep, the first half of the current financial year, is set to continue in the second half as well, as the underlying demand remains strong.
    Even in the face of trade tensions between the US and China, a slowdown in demand from China, and weakness in the rupee, most steel companies beat consensus estimates in terms of profit, operating profit, and sales in the September quarter.
    The pressure of higher raw material costs and low product prices was overshadowed by a richer product mix, operational efficiency, and captive iron ore for some producers.
    Though steel spreads could decline from their current seven-year high levels, they are expected to remain “fairly benign”, brokerage house Edelweiss Securities said.
    Typically, the second half of a financial year is a stronger period for steel-makers in India.
    After reporting better-than-expected earnings for its India operations for the September quarter, Tata Steel has said it expects margins to sustain at current levels in the second half of the year as well.
    The steel-maker expects to sustain its strong momentum, helped by robust demand from the automobile sector, particularly commercial vehicles, as well as spending on infrastructure by the government.
    The country’s largest steel-maker, JSW Steel, said some of the spending on infrastructure, which is likely to be front-loaded due to the general elections in 2019, will further support the demand for steel.
    It also expects demand for auto-grade steel to boost the overall demand for steel.
    “The metals and mining sector will be an important contributor to the growth in profits of the Nifty 50 index in FY19, accounting for 30% of the incremental profits of the Nifty 50 index,” Kotak Institutional Equities said in a report.
    The government’s decision to impose minimum import prices and anti-dumping duties for steel would continue to support high profitability in the sector, the brokerage firm said.

BASE METAL PRODUCERS 
    The outlook for makers of aluminium, however, remains bleak given that prices of alumina, a raw material, have been high amid weak prices of the metal.
    Prices of the metal, which are linked to those on the London Metal Exchange, could be supported by output cuts in China in the winter, and higher global growth, analysts said.
    Hindalco Industries and Vedanta are the two largest producers of aluminium in India. While Hindalco’s earnings could be boosted by access to captive alumina, Vedanta is likely to be weighed down by higher costs of power as well as alumina.
    Vedanta has said it is working on cutting production costs for aluminium, which have been at elevated levels for some time now.
    While the company has guided that its production of zinc is likely to be higher, the costs of producing zinc could be another hurdle for the company.
    While Vedanta’s consolidated bottomline was in line with estimates, its earnings for the September quarter were operationally weak.  End

Edited by Avishek Dutta

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This copy was first published on the Cogencis WorkStation

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