The BSE Metals Index started out the year like most other sectors with expectations of a turnaround. Between February and June 2014, the Index gained 65 per cent. Then came the turn in fortunes but not the one the sector was expecting. A global supply glut brought prices of metals down. Between its peak in June to date the sector is close to 30 per cent down.
Spot iron prices have fallen from $128 per ton at the beginning of the year to stand at $73 per ton - that is a fall of 43 per cent this year alone. Weak demand especially from China and deleveraging by Chinese traders has pushed prices lower. China - the biggest market for Indian steel manufacturers is no longer consuming as much steel as it did even a couple of years back.
Back at home, there is not much respite for the industry. Domestic iron ore production has fallen due to closure of mines in Odisha and Karnataka, pending statutory clearances, probes by the Supreme Court and delayed renewal of mines in Jharkhand (expected post-elections). The extent of the slowdown in production can be gauged from the fall in Odisha's merchant iron ore despatches: down 45 per cent (y-o-y) in September 2014 and lower by 15 per cent (y-o-y).
Outlook
Iron ore miners are likely to continue to see falling prices. A recent report by citi estimates ore prices could fall to as low as $50-60 in 2015. That's bad news for domestic miners. The glut in iron ore supplies that doesn't show any promise of a turnaround is another bad omen for the industry. The Government has set a goal of 1 billion tonnes of coal to be dispatched by 2020, up from 467 million tonnes in FY14. The Ministry of Coal has recommended capping of e-auction to 30 mtpa. Though this is not a formal policy, if this recommendation does become one, it will help Coal India. According to Kotak Research, this proposal could improve Coal India's earnings by as much as 13 per cent. Coal India is poised to benefit from such a move.
Star performer of the sector
Coal India
With metals down, Coal India is one of a select commodity company that can still wade though the slowdown largely unscathed. Its monopoly position (though there are suggestions from some corners to break it up) generates mountains of cash every year for the state miner. It is a money-making machine for the government. Reforms and the goal of the government to increase coal production in the country will benefit Coal India in the years ahead. The stock trades at an attractive dividend yield of 7.9%.
Metal prices down. Choppy outlook continues.
| Company Name | Sales Growth YOY | PAT Growth YoY | TTM EPS (G) YoY | TTM Ebitda margin (%) | D/E | ROCE (%) |
| Coal India | 1.87% | -12.29% | -12.29% | 34.55 | 0 | 49.67 |
| Hindustan Zinc | 1.94% | 4.61% | 4.61% | 67.30 | 0 | 23 |
| Sesa Sterlite | 194.43% | 296.60% | 296.60% | 37.18 | 1.11 | 16.6 |
| NMDC | 25.35% | 24.13% | 24.13% | 81.90 | 0 | 33.96 |
| Tata Steel | 11.20% | -159.30% | -159.30% | 11.62 | 1.93 | 9.69 |
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