Analysts predict a mixed bag for metals and mining companies in the December 2022 quarter earnings, with miners expected to perform well while steelmakers face margin pressures.
NMDC, an iron ore miner, is expected to report surging volumes and prices, lifting operating profits over 40%. Similarly, Coal India is anticipated to benefit from higher coal volumes and improved realizations, offsetting lower auction premiums and driving profitability.
Steel producers like SAIL, JSPL, and Tata Steel may face margin squeezes due to rising input costs of iron ore and coking coal. Despite their ability to pass on some cost hikes through higher steel realizations, cheaper imports might further dampen pricing power in the domestic market.
Aluminium makers like Hindalco, NALCO, and Vedanta are expected to post better profits from higher global prices, better coal feedstock availability domestically, and some cost efficiencies, although weak demand may cap sales volume off-take.
Impact on Retail Investors
For retail investors in the metals space, Q3 previews suggest better near-term prospects for ore miners like NMDC compared to downstream steel producers facing a margin squeeze. While steel producers might experience short-term challenges, their long asset life can provide valuation stability.
Investors in aluminium makers should consider factors such as inventory restocking potential, commodity price trends like iron ore and coking coal, and changes in power tariffs. Evaluating the portfolio’s tilt towards ferrous vs. non-ferrous metals and upstream miners vs. midstream producers is essential based on changing demand-supply scenarios and global and domestic market price trends.
Impact on Industries
Rising steel imports pose a concern for Indian steel demand in 2023, threatening domestic mills’ competitiveness. This could lead to industry-wide cost rationalization efforts, including seeking freight subsidies and lower iron ore pricing. For the aluminium industry, monitoring energy cost trends, scrap availability, and efforts to integrate operations is crucial.
Long Term Benefits & Negatives
In the long term, India’s steel demand potential remains robust, driven by urban housing and infrastructure development. However, mills need to counter margin risks from imported price arbitrage through scale, integration, and specialty product growth. Faster capacity expansion and achieving export competitiveness are positive moves.
The aluminium industry retains growth potential, but local value addition needs prioritization. Addressing external commodity supply chain risks and bolstering self-sufficiency in steel and aluminium capacities promise long-term benefits. Efficient miners with logistics access should be a focus for investors.
Short Term Benefits & Negatives
In the short term, metal producers’ ability to exercise pricing power depends on demand revival and input cost trends. Miners can benefit from volume and price tailwinds, but any sharp corrections in iron ore and coal prices give steel and aluminium makers flexibility in spreading gains through inventory de-stocking.
Fast-changing trade flows could introduce volatility, necessitating careful tracking of key user segments in construction, infrastructure, autos, and consumer goods for underlying consumption patterns rather than relying solely on industry forecasts.
Potential Gainers and Losers from Q3 Metal and Mining Performance
Indian Companies Likely to Gain:
NMDC (National Mineral Development Corporation): Expected best quarterly performance with 20% higher volume and prices, leading to a 40% jump in operating profit per tonne. This could boost market sentiment and potentially attract increased investor interest.
Coal India: Higher overall volume and increased pricing through FSAs will offset lower e-auction premiums, driving sales and operating profit. Positive market sentiment likely due to strong financial performance.
Hindalco Industries and Vedanta: Lower production costs and slightly higher aluminium prices might improve profitability despite muted sales. Potentially positive sentiment if they capitalize on cost efficiencies and maintain market share.
National Aluminium Co.: Ramping up of Utkal-D mine and higher alumina prices could lead to improved profitability. Positive market sentiment if operational expansion and favorable pricing translate into strong financial results.
Jindal Steel and Power (JSPL): Outperforming peers with 4% higher realizations and benefits from captive thermal coal. Operating profit per tonne expected to rise 12% sequentially. Potentially positive sentiment due to strong operational performance and cost management.
Indian Companies Likely to Lose:
Steel Authority of India (SAIL): Sharpest sequential drop in volume, potentially pushing the company towards losses in Q3. Negative market sentiment likely due to declining profitability and operational challenges.
Other steelmakers: Increased input costs (iron ore and coking coal) and higher imports could impact profitability despite potential price increases. Companies like Tata Steel and JSW Steel might face neutral or slightly negative market sentiment depending on individual performance and mitigation strategies.
Global mining companies: Higher metal prices in India could benefit global players like BHP Billiton and Rio Tinto, potentially leading to positive market sentiment.
Global aluminium producers: Higher aluminium prices in India could also benefit companies like Alcoa and Rusal, although muted sales might temper the gains. Overall sentiment likely neutral or slightly positive.
Global Companies Less Impacted:
Global coking coal exporters: Increased coking coal demand from India might be offset by potential supply chain disruptions or price competition from other regions. Market sentiment likely neutral unless significant changes in trade dynamics occur.
This analysis is based on the provided information and current market conditions. It is not financial advice and investors should conduct their own due diligence before making any investment decisions.