Slight macro positivity amidst elevated supply in metal sector: IIFL Capital Services

19 Oct 2023 , 11:31 AM

Chinese macro data on PMI/Auto sales/Industrial activity lends some comfort for metals, even as RE remains a key drag. For Steel, elevated Chinese exports (annualised 96.7mt in Sep’23) remains a key concern, even as delayed BIS approvals have supported the domestic steel price outlook recently. Rising costs would hurt spreads for domestic steel producers starting Q3. For Aluminium too, elevated Chinese production is capping the upside even as stable costs and multi-year low inventory levels provide some support on the downside. Analysts of IIFL Capital Services continue to like JSPL, Tata Steel and Hindalco among their coverage universe. 

China – RE still sluggish; other macro sees some improvement: 

The recently-released macro data for China highlights that real estate (RE) activity remains sluggish with 26 consecutive months of decline in new housing start (-15% in Sep’23) and continued decline in underconstruction area. However, other indicators give some ray of hope with manufacturing PMI returning to positive zone after 5 months, and sustained steady growth for Auto sales and Industrial activity in Sep’23. 

A weak global Steel outlook; India an outlier: 

In Sept’23, Chinese Steel production dropped 5% MoM to 82mt, amid increased BOF steel mill losses. However, sluggish local demand meant that even as Chinese exports declined 2.7% MoM, they still were elevated at an annualised run-rate of 96.7mt. Hence, steel prices continued to weaken across regions. Rise in coking coal and iron ore prices drove a larger impact on spreads. India has been an outlier with domestic prices rising amid falling imports (delays in BIS certification); which has meant that the fall in spot spreads is more modest vs global levels. 

Aluminium outlook subdued amid weak demand and healthy production: 

LME Al price has remained capped at around US$2200/t amid sluggish demand globally, even as Chinese Aluminium production has sustained at higher levels amid healthy power availability. Stable costs and inventories at multi-year lows are the key support, until there is a demand recovery. Weak LME Al has also taken a toll on the North American scrap spreads (relevant for Novelis).