In Commodity News 05/01/2016
The global commodity free fall played havoc with Indian metal companies in 2015, pushing many to the brink of operational losses and capacity shutdowns. The new year will be crucial to see which way the prices move. Metal manufacturers will also be banking on a pick-up in the domestic economy and some support from the government to fend off cheaper global imports.
TRENDS TO WATCH
Debt restructuring
In 2015, banks invoked strategic debt restructuring for a number of stressed steel makers. Over the next 18 months, banks will look for buyers for these assets. The availability of assets at potentially reasonable valuations may give larger firms the option to buy assets and consolidate their hold on the markets. Private equity firms which run stressed asset funds may also emerge as buyers.
Mine auctions
2016 will see states auction manganese, limestone, copper and iron ore mines for the first time Watch out for the bidding strategy that metal companies will adopt. Global commodity prices are at record lows and Indian metal companies are highly leveraged. This may dent their ability to bid aggressively.
Chinese policy
2015 saw steel and aluminium imports, mainly from China, erode a significant amount of the incremental demand growth in India for these metals. With China continuing with policies to boost exports, the industry remains wary. A further devaluation of the yuan could also make Chinese imports more cost-effective. The industry is now looking for production cuts from Chinese metal makers which could improve the global oversupply situation.
Domestic trade policies
India plans a minimum import price for steel products to protect domestic manufacturers from growing imports. The price band for the minimum import price will be important to see if it helps curb imports. Industry experts say the benefits from safeguard duties for steel products has been limited so far. This may force the government to do more.
Government spending
India’s top three steel producers JSW Steel Ltd, Tata Steel Ltd and Steel Authority of India Ltd (SAIL) will commission fresh production capacities. This will add to the supply-side pressure even as demand growth stays a modest 5.3%. Government spending on Make in India and other infrastructure projects could push steel demand growth rates. If all government spending commitments are met, steel demand growth could rise to 6%.
COMPANIES AND PEOPLE TO WATCH
JSW Steel: JSW Steel Ltd plans to touch 18 million tonnes in steel capacity by March, making it the largest steel maker for a brief period before SAIL takes over again after its new capacities get commissioned later in the year. Also watch out for JSW Steel’s iron ore auction strategy. If sourced at the right price, auctioned iron ore mines could help reduce the steel maker’s overall operational costs and improve margins.
SAIL: State-run Steel Authority of India Ltd (SAIL) is expected to post its first earnings before interest, taxes, depreciation and amortization (Ebitda) loss for the year ending March. Next year will also see SAIL increase capacity to 20 million tonnes, which would add higher depreciation and interest costs. Watch out for SAIL’s strategy in a tough market, battling lower margins, higher costs and declining market share.
Tata Steel: With an additional 3 million tonnes in capacity going on stream in 2016, watch out for Tata Steel Ltd’s strategy to sell this incremental supply without hurting margins. In Europe, 2016 would be crucial for Tata Steel to find a buyer for its long steel business. Also watch out from any further cost and job cuts for the Europe business.
Hindalco Industries: If aluminium prices bottom out in 2016, it could help Hindalco arrest falling margins. The fall in aluminium prices in 2015 has pushed Hindalco close to an Ebtida loss on its aluminium business. Any unexpected further lows in prices could pose severe challenges.
Vedanta Ltd: Global prices for iron ore, copper and aluminium touched multi-year lows in 2015, pushing Vedanta to the brink of losses. Its fortunes across many of these businesses are entirely dependent on global commodity prices. The company’s zinc division, however, is likely to gain from global production cuts.
