Commodity Online
MUMBAI: Metal sector found improving with increased thrust on infrastructure spending by both India and China boosting the overall business environment for domestic metal companies.

Metal companies traded firm on the bourses over past three months, with staggering rise in the company stock price. Private sector major, Tata Steel Ltd (BOM:500470)surged from Rs.130 during mid-March to Rs.455.80 recently, public sector steel maker, Steel Authority of India Ltd (SAIL) (BOM:500113) rose from around Rs.80 to Rs.170 recently.



Similarly, other metal stocks including Hindalco Industries Ltd, Sterlite Industries Ltd and National Aluminium Company Ltd (NALCO) posted heavy gains on the bourses during past three months. Birla group major, Hindalco Industries Ltd (BOM:500440) surged by over 50% from Rs.45 during mid-March to Rs.100.5 recently, similarly, Sterlite Industries Ltd (BOM:500900) rose from Rs.325 to Rs.718 recently. Aluminium major, NALCO (BOM:532234) too posted healthy rise on BSE from around Rs.230 during mid-March to Rs.362.6 on Friday.

This seems to have provided better visibility to the targeted volume growth the domestic companies. Moreover, all the companies have embarked upon huge cost reduction programs to shield from the global meltdown. This step by the companies provided the much-needed cushion to the falling margins due to steep fall in realizations. Most of the companies have shown the actual reduction in cost of production in their earnings.

The steel prices seem to have bottomed out and with the improvement in demand, they are expected to head northward. Prices in China have increased to around USD 440 per tonne from USD 400 per tonne FOB. But the landed cost in India comes to around USD 480 per tonne.

The Indian prices are currently around USD 500 per tonne. If the domestic steel producers are not allowed to increase prices by the Government, then the imposition of anti dumping duty seems to be less likely as there will not be any significant disparity in the domestic prices and landed cost.

Taking cue from the contracting margins, most of the players have embarked on cost reduction programs to maintain their margins. JSW has announced various measures to increase efficiency, optimizing input blends and lower raw material prices. Sterlite is also targeting to reduce cost of production across divisions, especially aluminum – to reduce cost from as high as USD 1,400-1,500 per tonne to around USD 900 per tonne and zinc from USD 680 per tonne to around USD 600 per tonne. Sesa Goa is planning to reduce its mining cost by improving logistics and increasing productivity.

In the wake of global meltdown and squeezing margins, all the companies were found to be taking various measures (as seen above) to reduce their cost of production to provide cushion to their margins. However, this has raised some needling questions on the operating efficiencies of various companies especially during peak times.

According to research analyst Emkay global Financial Services Ltd, all the cost reduction programs undertaken by various companies, if properly implemented and actual benefits realized, would yield positive results with much-required cushion to the companies’ squeezing margins.

Nevertheless, the reduction in cost of production and improving domestic demand will provide the cushion to margins and will enable them to show better growth as compared to their global peers. Considering these factors, Emkay research believed that the performance of metal companies would improve in days to come, yielding better returns for the shareholders.

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