The September quarter numbers of most metal and mining companies indicate that a majority of them are fighting demand woes while escalated costs have eaten into their profits. The outlook for the mining sectors is also hazy due to regulatory hurdles, such as the pending land acquisition Bill and the mining ban in states like Goa and Karnataka.
Analyst believe that the broader underweight on the sector may continue for some more quarters before these issues are sorted out.
“The sector, in general, is influenced by the meek international macro environment. Amid falling demand, the September quarter numbers for some companies were supported by forex gains,” said an analyst.
During the quarter, Sesa Goa, NMDC, SAIL and Hindalco reported a 2-63% decline in their topline. Sesa Goa was particularly hit as its mining operation in Goa and Karnataka were completely shut due to regulatory issues. Heavyweights Tata Steel and Hindalco disappointed the Street as the former reported a loss at consolidated level, while the latter witnessed its standalone profit dip 30%.
“While Tata Steel’s Europe sales were bit of a surprise for the traders, its domestic business underperformed due to higher costs and weighed on its overall performance,” said an analyst. The company reported a net loss of $2 per tonne in the quarter compared to $35 profit in the same quarter last year.
Steel prices have declined about 5% q-o-q during the three months to September due to new capacity additions and weak demand. As a result, steel producers are currently utilising 75-78% of their capacities against 85-90% during the good times. Analyst predict that demand environment may take another quarter to show some improvement.
“Prices may decline by another 2% to 4% during the period, while the cushion of the declining iron ore and coking coal prices may only get reflected in the bottomline from December,” said Saurabh Agarwal, metals and mining analyst with Kotak Securities.
Average prices of base metals like Copper, Zinc and Aluminium have declined by 14% to 20% during the quarter compared to last year due to anemic demand amid recession in Europe, tepid recovery in the US and economic slowdown in emerging economies like China and India.
“The monetary easing measures, including US Fed's quantitative easing, have supported the prices, which, otherwise, would have been much lower given the current demand scenario,” said Agarwal.