Subdued domestic demand due to poor investment cycle, upcoming Lok Sabha elections and important developments in the global markets is expected to keep excitement out of the metal sector for most part of 2014, said analysts and industry officials.

With general elections a few months away and inflation at all-time high, very little can improve in the prevailing investment cycle in the domestic market, they said. Due to this, demand for ferrous as well as non-ferrous metals, which find wide application in industrial activity, will remain dull next year, they added.

Shares of metal companies were on a roller-coaster ride in 2013 and most fell sharply in the June to August period as rupee plummeted increasing the cost of production of metal companies. Demand improvement in Europe and the US from September have pushed up revenues in turn helping companies recoup their losses to some extent in the latter half of the year.

The BSE Metal Index had tumbled to an intra-day low of 6,354 on 7th August (a level last seen in April 2009) from a 2013 intra-day high of 11,510 seen on 8th January, before recovering partly to 9,728 levels currently. The recovery, to an extent, is also due to higher domestic realisations as a result of the fall in rupee's value.

“Nothing is seen improving on the demand side in the metals sector for the next 6-9 months,” Abhisar Jain, research analyst with Centrum Broking Ltd said.

Metal stocks have peaked out and we don't see any incremental increase coming in next year, said another analyst.

Usually, no major decisions are taken by the government ahead of elections and so not much is expected to change in the first half of 2014 at least, analysts said.

The country will be going for general elections next year. The current 15th Lok Sabha will complete its constitutional term on May 31, 2014.

Also, realisations of metal companies especially that of steel are likely to take a hit as product prices will be ruling in their troughs due to weak demand, said an analyst from another brokerage in Mumbai. Companies will have to rely on volume-led growth in 2014, she said.

Among steel companies, Steel Authority of India Ltd, which recently increased its capacity to 17million tonne so far this year from 14 million earlier and so may see some volume growth along with JSW Steel which may boost its export volumes.

None of the non-ferrous companies, however, are seen witnessing any major volume increase next year, said analysts. Hindalco Industries’ 359,000 tonne per annum Mahan aluminium smelter which is currently undergoing trial runs may see just about 100,000 tonne in the first year in 2014 which is not a significant quantity, they said.

Though realisations of mainly of ferrous companies may take some beating in near-term, cost saving initiatives, increase in commodity prices later in the year, and company specific strategies may lend some support, keeping the overall operating profits of most firms intact, analysts said.

“Though the year may not be that great for metal companies, we don't see profitability of these companies getting affected next year,” said an analyst with a domestic brokerage. Operating profits will remain stable, he said.

Ferrous Segment

The domestic steel industry has gone through a big cyclical downturn in 2013 with revenues getting battered due to weak demand and expenses bloating on the back of higher cost of production due to weak rupee. However, increased exports amid depreciating rupee cushioned companies during the year.

“Overall, we see just 3-4 percent steel demand next year,” said Giriraj Daga, senior analyst from Nirmal Bang.

On the raw material front, global coking coal prices bear the risk of an upward trend in the near-term if weather conditions in Australia, the leading supplier of coal to steel majors across globe, turn hostile.

Impact of this price rise, however, would depend on the extent of reliance of the steel company on Australian coal.

Steel Authority of India Ltd and JSW Steel largely depend on Australian coking coal imports, while Tata Steel meets about 60% of its coking coal requirements from its own captive mines.

Coking coal and iron ore are the two raw materials used by the steel industry in the making of the alloy.

“December to February is usually the period when cyclones hit Australia causing disruption to mining and port acitivities there,” said Jain of Centrum Broking. Due to this, prices of coking rise on the back of tight supply situation, he said.

At present, coking coal prices are stable at about $150-155 per tonne.

On the domestic iron ore supply side, shortage of ore in Karnataka and ongoing mining ban in Goa will continue to keep prices of the material elevated in coming months, said analysts.

In Karnataka, at present, only 15 mines are operational with an annual production of 5.5 million tonnes. However, companies like Sesa Sterlite and NMDC are expected to enhance production in Karnataka, whereas the same for Goa is dependant on the Supreme Court's approval.

Among the top steel companies, Mumbai-based JSW Steel Ltd has no captive source to meet its iron ore requirement and is relying on Karnataka ore to meet its need. The company has a 10-million-tonne plant in Karnataka which is currently running at 75-80 percent of the capacity.

Not much is expected to change on the ongoing mining ban front in Goa, said analysts.

The mining ban issue in Goa seems to be going the Karnataka way, said an analyst with a domestic brokerage. Even if the ban in Goa is lifted now, it will take quite some time for mines to start producing given the several clearances and procedures miners have to go through before commencing operations, he said.

To at least have a volume-led growth in 2014, analysts suggest that companies engage in aggressive marketing in not just urban market but also into domestic rural areas through their retail initiatives.

Tata Steel, Steel Authority of India, Essar Steel, Jindal Steel & Power and JSW Steel have retail initiatives that cater to small size requirements mainly in tier-I, tier-II cities.

Tata Steel can engage itself in aggressive marketing strategies especially at its European operations in order to maintain or increase its volumes, they said. The company could also look to tap its non-traditional market to increase its customer base.

Demand in Europe has not looked up despite better purchase managers index data and so companies there will have to make additional efforts to churn bigger revenue growth, said analysts. Centrum brokerage in its recent report said it sees downside risks for Europe operations of Tata Stel.

South-East Asian operations are also under pressure currently due to shutdown in Thailand (due to political tensions) affecting volumes and narrowing spreads at Natsteel, said the brokerage.

Increasing steel exports and improving efficiency should be the focal point for SAIL, opined analysts.

Brokerages are bearish on SAIL stock due to its high operational cost structure in a tough demand environment and competitive market. The state-owned company reported an EBITDA margin of 9.6 percent in Apr-Jun which contracted further to 7.6 percent in Jul-Sep.

“Of the lot, JSW Steel seems to be most efficient,” said Jain of Centrum. The company’s capex cycle has peaked out and is also exporting substantial quantity, he said.

Though the company is facing issues on procurement of iron ore in Karnataka, it has been managing with the help of beneficiation plants at its Vijayanagar unit, which converts the low-grade ore to high-grade ore which in turn can be used to make quality steel.

“Overall for the steel sector, it will be a wait-and-watch period for first six months atleast, and once the new government is formed then there may be some spurt in construction and manufacturing sector we are hoping,”said an official from state-owned Rashtriya Ispat Nigam Ltd. “The steel sector will see slight uptrend in 2014 but cannot expect much buoyancy this time (in 2014),” he said.

Non-Ferrous Segment

The trend in base metal companies will largely be driven by international factors such as economic growth in China and execution of bond buying tapering programme of the US Federal Reserve.

From January 2014, the US central bank would be cutting back the bond purchase operations to $75 billion a month from $85 billion earlier. Based on the economic and other key data, the US Fed may take further action in terms of QE tapering.

Though the US Fed announcement will trigger downside in dollar denominated commodities like base metals in the immediate near-term due to knee-jerk reaction, firm global demand for these commodities is expected to take prices higher later in the year, said analysts.

Pertaining to performance of domestic non-ferrous companies, brokerages are bearish on Sesa Sterlite due to its company specific issues such as high debt and unutilised capacities.

The group is saddled with unutilised capacities at Vedanta Aluminium and BALCO despite having spent 90% of the capex, said Centrum in its report.

State-owned National Aluminium Co Ltd, which is also currently hit due to weak demand for the light metal and pressured prices on the London Metal Exchange because of high inventories, will continue to see downside unless either of the factors catch pace. LME warehouses currently hold 5.4 million tonne aluminium.

“Unless we see aluminium prices moving up there is nothing that will change for aluminium companies,” said the analyst with domestic brokerage. The inventories are so high in aluminium that even if they fall, it will not lead to a major increase in aluminium prices, said the analyst.

In case of Hindalco Industries, cost escalations at new projects and lower than expected volume ramp up could be the negatives for the company, while increase in LME prices and clearance for coal mining at Mahan block would be the postives.

Both Hindalco Industries and Sesa Sterlite are into copper smelting and so prices of copper on the LME do not affect the business of the two companies. Hence, its the treatment charges-refining charges (TcRc) that matter most.

In 2014, the global TcRc benchmark is seen at $90 per tonne, higher from $72 seen this year. This is expected to help the two companies as their copper business will continue to do well, said analysts.

“Copper smelting companies were making money even at $72 Tc/Rc so anything higher than that they are surely to do welll,” said Daga of Nirmal Bang.

However, Sesa Sterlite’s copper smelting business contributes only 5 percent to the consolidated profit of the company, while Birla Copper contributes about 19 percent Hindalco’s consolidated profit. Due to this, gains from the copper smelting business will not really help respective companies turnaround their performance.

“Domestic demand (for metals) in 2014 is not going to be as good as it was in 2009 or 2010 but yes some demand will surely be there,” said a source from Sesa Sterlite Ltd. “First six months of the year it will be slow with the government forming and stablising but we are expecting it to pick up later and should be well in 2015,” he said. In the global market also we see a growth of about 3-4 percent next year, he added.

In contrast, most analysts are positive on Hindustan Zinc Ltd (a listed subsidiary of Sesa Sterlite) as lower cost of production and good demand for the zinc is expected to keep the company in the advantageous position through the year.

Global zinc prices should outperform amongst the base metals with support from Chinese consumption, said analysts.

Though analysts remained unanimous on not-so-good performance of metal sector in 2014, they also remained undivided on the view that the non-ferrous segment will perform better than the ferrous lot.

“We see 8-9 percent demand in the non-ferrous segment next year,”said Daga of Nirmal Bang.