No brighter outlook for Indian metal companies in 2014

Subdued domestic demand due to a poor investment cycle, the coming general elections in India and important developments in the global markets are expected to keep the excitement out of metal companies for most of 2014, analysts and industry officials say.

With general elections a few months away and inflation at an all-time high, very little can improve in the prevailing investment cycle, they said. Due to this, demand for ferrous and non-ferrous metals will remain dull next year.

Shares of metal companies were on a roller-coaster ride in 2013 and most fell sharply in the June to August period, as the rupee plummeted, increasing their cost of production. Demand improvement in Europe and America from September have pushed up revenues, in turn helping companies recoup their losses to some extent in the latter half of the year.

Usually, no major decisions are taken by the government ahead of elections and so, not much is expected to change in the first half of 2014 at least, analysts said.

None of the non-ferrous companies, are seen witnessing any major volume increase next year, said analysts. Hindalco Industries’ Mahan aluminium smelter might see just about 100,000 tonnes in the first year in 2014, not a significant quantity, they said.

Analysts said cost-saving initiatives, increase in commodity prices later in the year and company-specific strategies might lend some support to metal companies next year, keeping intact the overall operating profits of most.

The trend in base metal companies will largely be driven by international factors such as economic growth in China and execution of the bond-buying tapering programme of the US Federal Reserve. Though the US Fed announcement will trigger a downside in dollar-denominated commodities such as base metals in the immediate near term, due to a knee-jerk reaction, firm global demand for these commodities is expected to take prices higher later in the year, said analysts.

Back home, brokerages are bearish on Sesa Sterlite due to company-specific issues such as high debt and unutilised capacities. The group is saddled with unutilized capacities at Vedanta Aluminium and Bharat Aluminium, despite having spent 90 per cent of the capex, said Centrum in its report.

State-owned National Aluminium Co Ltd, which is also currently hit due to weak demand for the light metal and pressured prices on the London Metal Exchange because of high inventories, will continue to see downside unless either of the factors catch pace. LME warehouses currently hold 5.4 million tonne aluminium.

“Unless we see aluminium prices moving up there is nothing that will change for aluminium companies,” said the analyst with domestic brokerage. The inventories are so high in aluminium that even if they fall, it will not lead to a major increase in aluminium prices, said the analyst.

In case of Hindalco Industries, cost escalations at new projects and lower than expected volume ramp up could be the negatives for the company, while increase in LME prices and clearance for coal mining at Mahan block would be the positives.

“Domestic demand (for metals) in 2014 is not going to be as good as it was in 2009 or 2010 but yes some demand will surely be there,” said a source from Sesa Sterlite Ltd. Though analysts remained unanimous on not-so-good performance of metal sector in 2014, they also remained undivided on the view that the non-ferrous segment will perform better than the ferrous lot.