Metal cos reaping benefit of inflation-News Item(from India)

30 Jun, 2008, 0543 hrs IST,Santanu Mishra, Economic Times, India Bureau

Higher inflation and slower economic growth, not only in India but also across the
globe, have resulted in a headache for many policymakers around the world. Metals,
along with agri commodities, are the main culprits of higher inflation. But this spells
good news for some metal companies, which are reaping the maximum benefit from
this.

The metal industry is mainly categorised into two segments, ferrous and non-
ferrous. The ferrous sector comprises companies producing iron, steel and steel
alloys. Similarly, non-ferrous companies are those which produce non-ferrous
metals like aluminium, copper and zinc, among others.

The dynamics of both these sectors are different from each other. An important
point to remember is that the prices of metal products are highly correlated to
international benchmark prices, which in turn, depend on the global economic
environment.

FERROUS SECTOR:

This sector is categorised into two sub-segments, primary and secondary steel
(value-added products) producers. The sector witnessed a lot of action in FY08.
First, steel prices sky-rocketed due to ever-rising cost of inputs like iron ore and
coking coal (iron ore and coking coal prices increased by around 65% and 200%,
respectively, in FY08 compared to FY07).

As a result, hot rolled coil prices (a benchmark for steel prices) almost doubled in
FY08, compared to the previous year. This rise led to inflationary pressures and the
government was forced to intervene to cool off steel prices.

Following an agreement between steel producers and the government, domestic hot
rolled coil prices were slashed by around 10%. To compensate for this reduction in
steel prices, the government removed the export duty of 5-15% on flat products
(used in auto and the white goods sector), but increased the export duty on long
products (used mostly in the construction industry) to 15%. This measure will help
companies such as JSW Steel, which produces and exports a large amount of flat
products.

To satisfy the long pending demand of primary steel producers and make iron ore
available for domestic consumption, the government also imposed a 15% ad-
valorem export duty on iron ore. This will negatively affect the financials of
companies like Sesa Goa, which export more than 90% of their ore production.
Overall, primary steel producers with captive mines, like Steel Authority of India
(SAIL) and Tata Steel, are in a better position than other players.

NON-FERROUS SECTOR:

Lower sales realisation, higher manufacturing costs and a strong rupee were some of
the major concerns for companies in this segment in FY08. Aluminium and copper
prices remained subdued during the most part of FY08. As a result, most companies
in the non-ferrous segment reported poor numbers for FY08. The topline of the top
five companies in this segment remained almost flat, whereas the bottomline
declined by around 4%.

Most companies adopted the volume growth strategy to offset the negative impact of
falling prices. For instance, Hindalco’s aluminium and copper production for FY08
was 8% and 12% higher, respectively, compared to FY07. However, higher
manufacturing expenses, especially staff and power costs, eroded operating profit
substantially.

The operating profits of the top five companies declined by around 21%. Going
forward, aluminium and copper prices are expected to remain robust, thanks to
supply disruptions like power shortage and labour protests. However, zinc prices are
expected to remain range-bound in the near term. A higher sales realisation
compared to last year and a depreciating rupee are expected to bring some relief to
non-ferrous companies this year.