Q3 earnings preview: Metals and mining

Q3 earnings preview: Metals and mining

Last Updated: Thu, Jan 10, 2013 02:31 hrs

It’s likely to be another lacklustre quarter for metals and mining companies, as the benefits of price hikes and lower raw material costs will only become visible in the fourth quarter. The third quarter will see most companies, ferrous and non-ferrous alike, reporting muted revenue growth, as demand has stayed sluggish. As a result of weak demand, realisations too, have remained lower. Analysts believe non-ferrous companies are expected to do marginally better due to a slight uptick in prices globally. With the change of leadership complete in China, the country has returned to the world’s commodity markets to re-stock. ICICI Securities believes the true impact of re-stocking should be felt in Q4FY13 where simultaneous impact of price rise as well as weak raw material prices can lead to a positive surprise.

For steel producers, the top line will be driven by volume growth but this will not translate into higher earnings as realisations are down. Volume growth would be in the five-ten per cent range over the December 2011 quarter for most players on relatively healthy demand. Margins are expected to remain under pressure as domestic prices remain subdued and the weak rupee has not allowed the benefits of cheaper raw material to flow into the bottom line. For instance, Tata Steel’s realisations in the domestic market are down two per cent sequentially and operating profit is down five per cent in the quarter. Religare expects Tata Steel Europe’s operations to be under pressure with Ebitda losses of $15 a tonne on weak demand. Analysts believe Tata Steel and SAIL are the best placed companies to gain from an uptick in steel demand.

Aluminium producers are also not likely to post spectacular growth numbers this quarter. The shutdown of power plants (Hirakud for Hindalco) and loss of production (Nalco) are two major concerns that would have affected performance. Kotak Institutional Equities expects Hindalco’s operating profit to recover from a decline in the first half of FY13, led by higher copper and aluminium production. Aluminium prices on LME too, are up four per cent, which would help improve realisations in Q3.

The story is no different for mining players as most listed companies in the space have seen volumes declining due to closures. With iron ore operations closed, Sesa Goa and NMDC are expected to report volume decline, both sequentially and annually, which suggests that price recovery is unlikely due to moderating domestic demand. Analysts are expecting earnings to decline for NMDC. For Coal India too, the uptick in volumes would be offset by higher wage payouts. Analysts believe the fourth quarter would be better for the sector as a host of positive factors would start reflecting.

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