Slightly better macro in metal sector: IIFL Capital Services

20 Nov 2023 , 10:27 AM

Chinese macro data on auto sales/industrial activity saw further improvement in Oct’23, even as real estate sector weakened further. Global steel prices inched up in Oct’23 with low profitability driving production cuts in China, even as exports remain elevated. Rise in imports remains the key risk for domestic steel prices that are at ~17% premium to imports. For aluminium, weak demand globally and fall in key RM costs have kept prices range-bound. Analysts of IIFL Capital Services continue to like JSPL, Tata Steel and Hindalco among their coverage universe. 

China seeing gradual improvement even as RE deteriorates: 

While new housing starts and consequently area under construction declined at a pace higher than Sep-23, there are pockets of demand improvement visible. PV sales grew faster in Oct’23, as did broader industrial activity. Overall investment in fixed asset construction also saw higher growth, which is a positive for commodity demand in China. 

Steel – better pricing even amid elevated Chinese exports: 

Steel prices in China and Europe have seen an uptick from the recent lows. Very weak profitability seen in China prompted cuts in production (down 3.7% MoM in Oct’23). BoF’s are still in loss of US$15/t vs loss of US$45/t seen in Sep’23 and should support further production cuts. However, Chinese steel exports remain elevated at an annual run rate of 95.3mt. Indian steel prices have weakened but are still ~17% higher than the landed cost of imports. Steel imports into India rose in Oct-23 and presents further downside risk to domestic steel prices, despite the domestic demand remaining strong. 

Aluminium range-bound amid healthy production and lower costs: 

LME Al price has remained capped at around US$2200/t amid sluggish demand globally, even as Chinese aluminium production rose further by 1% MoM. A key positive was drop in Chinese Al exports by 6% MoM and emergence of power shortages in Yunnan. Local market premiums continue to fall globally which highlights the weak demand environment. Fall in Al CoP led by fall in energy prices is offsetting possible support from lower global exchange based inventory