Further price fall in base metals & steel unlikely in near future

Further price fall in base metals & steel unlikely in near future. Prices of base metals and steel have been increasing for quite some time now. However, there is a sharp surge in these metal prices in the current quarter compared with the June 2010 quarter. At 22.5%, zinc prices have increased the fastest on LME (London Metal Exchange). Prices of copper, aluminium, and steel have risen by 16%, 12% and 15.4%, respectively. China, the world’s biggest aluminium and steel consumer, may see a relatively slow growth in its economy this year but it is still expected to grow 9% annually. Since the current steel and aluminium prices are already near the Chinese marginal cost of production, there is little probability of further price fall. In addition, the recent removal of subsidies for heavy industries by the Chinese government has triggered production cuts. India’s aluminium major Hindalco’s stock price moves in tandem with international aluminium prices with a historical correlation co-efficient of 0.81. The co-efficient measures the strength of relationship between two parameters: a value which is closer to one reflects a strong direct relationship. Given this, Hindalco could be the first one to reap the benefit of higher prices. Increase in steel prices as predicted, will benefit suppliers of iron ore, a key input for making steel. Sesa Goa stands to gain as Chinese steel makers are its top iron ore consumers. This should support Sesa Goa’s stock price, which fell significantly after its proposed involvement in Cairn India’s buyout. Higher steel prices should also boost the topline of Tata Steel’s subsidiary, Tata Steel Europe. Another beneficiary will be SAIL, which struggled with its high inventory pile-up in the June quarter. It can now sell its inventory at higher prices. World Copper prices may rise in the near future because of a strong Chinese demand, improved offtake by OECD nations and constrained supply. Also, a further drop in inventories may boost copper prices. Sterlite and Hindalco should benefit from this though its extent may be muted. Although zinc prices have bounced back from its lows, downside in its prices appears to be limited. Possible appreciation of yuan and recent wage hike in China can support prices in the medium term. Hindustan Zinc, which has a very high operating margin, appears to be the best stock at the moment as historically it follows the LME zinc prices.