That metal prices move in cycles is well-known. Still, the uptrend after the outbreak of Covid-19 has been nothing short of spectacular. Consider this —US Midwest domestic hot rolled coil steel prices have risen more than three times since April 2020. Copper is up 44% since October 2020 on the London Metals Exchange (LME). Aluminium is up 65%.

But why Covid-19? The pandemic was a giant demand killer but brought good tidings for metal companies after the initial hit as nations started stimulating their economies, pushing excess liquidity into commodities and other financial assets. Then, China cut back production of metals, especially steel, to protect its environment, even as governments such as India’s went on a construction overdrive to manage social distress from job losses due to pandemic lockdowns.

In India, average price of hot rolled coil (steel) rose 55% from ₹44,880 per tonne in November last year to ₹69,600 a tonne in October this year. Cold rolled coil prices rose 81% to ₹90,880 per tonne from ₹50,060 per tonne in November 2020. With prices showing no signs of abating, metal producers such as Tata Steel are laughing all the way to the bank. In the first half of this financial year (April– September), listed metal and mineral companies reported an all-time high net profit of ₹82,500 crore, close to 14 times the ₹6,000 crore in the same period of the previous financial year. With metal makers getting pricing power, demand remaining high, and profitability rising, is the metal sector in the middle of a super cycle?

After all, LME prices of metals such as zinc, lead, nickel and tin, too, have seen a similar trend in the last one year. Tin prices on LME, for instance, have more than doubled to $3,772.30 per 100kg since October 2020. The benchmark S&P GSCI index, a barometer of commodities markets, has more than doubled from its April 2020 low of 241.45 to 567.13 (November 19).

The world has witnessed four commodity super cycles till date. Three – triggered by US industrialisation in early 20th century, rise of Nazi Germany in 1930s and re-construction of Europe after World War II – stemmed from social and geopolitical disorders. The fourth was led by infrastructure build-up in China after it joined the WTO in 2001.

Is the current cycle similar? Will it last?

Stimulus, Infrastructure Build-up

After the Covid-19 outbreak, governments across the world rolled out stimulus packages totaling about $20 trillion. Almost a third of this has found its way to infrastructure projects and supported metal prices, as per domestic steel industry estimates. The good news is that there is no sign of government spending moderating any time soon. The latest is the Joe Biden administration’s $2 trillion plan to “overhaul and upgrade” the nation’s infrastructure.

India, too, has been very much a part of the global infrastructure boom. The central government, for instance, has announced a ₹5.52 lakh crore capital expenditure for FY22 with focus on highways, railways and health, pushing demand for steel and other commodities. It is likely to further increase these allocations in Budget 2022-23.

Then there is the massive global push towards building green energy infrastructure. The domestic steel industry is also bullish on demand from renewable energy projects as well as the automobile sector. “We are already supplying for solar panels,” says Tata Steel Managing Director T.V. Narendran. Another factor driving demand is government’s thrust on laying pipelines for ensuring 24-hour drinking water supply, say industry executives.

The China Trigger

At the other end of this demand boom is China, whose production curbs to reduce pollution have caused supply disruptions in global markets. China’s crude steel production fell from 99.5 million tonnes in May to 73.8 million tonnes in September this year, according to data from the World Steel Association. The September production was down 21.2% YoY. This gives other nations a chance to fill its void in global markets.

Over the last decade, China had been a major disruptor in the global metals market, selling at ultra-cheap prices and forcing nations to impose import curbs to protect their producers. In June last year, India also imposed anti-dumping duty on various steel categories from China, Vietnam and South Korea. Steel prices went up from ₹47,325 per tonne (hot rolled coil) in June 2020 to ₹57,250 a tonne in December last year. However, with prices going through the roof and impacting small businesses, Finance Minister Nirmala Sitharaman announced reduction in customs duty on flat and long products of non-alloy, alloy and stainless steel from 12.5% to 7.5%. Benchmark prices cooled to ₹53,550 a tonne in March before rising again on account of domestic demand to ₹66,000 a tonne. India’s top steel maker, Tata Steel, which reported a 661% increase in consolidated net profit to ₹11,918 crore in Q2 of FY2022 as against ₹1,565 crore a year ago, is confident of strong steel consumption in India. “India is well-positioned from the steel industry’s point of view. We believe consumption of steel in India will grow quite strongly,” says Tata Steel’s Narendran. “With focus on infrastructure, I am seeing investment-led growth, which means steel consumption will grow at least on a par with the GDP growth rate,” Narendran says, adding that renewables is also a good opportunity for steel makers. He says China may not remain a disruptor in global markets as it is pacing production to its domestic needs. He expects steel prices to remain higher than in the last 10 years.

Other industry representatives say India is on the threshold of a multi-year super cycle as far as metals, specifically steel, are concerned. “A transitional event is causing revival in demand in the market. Government response towards Covid-19 economic revival is metal intensive. That is one trigger.

Another trigger is transition to green infrastructure, which requires steel. We are very optimistic on domestic demand,” says Seshagiri Rao, Joint MD and Group CFO, JSW Steel. Rao says current $15-16 million demand from renewables may grow to $90-100 million in coming years.

JSPL MD V.R. Sharma says steel demand is likely to sustain for at least a decade as $5-6 trillion out of the $20 trillion global stimulus will come to the steel sector. “This will translate into huge demand in the next one decade, which will pave the way for new investments. Additional capacities will start getting added by 2024-25. Global steel consumption will continue to rise 5-7% Y-o-Y,” says Sharma. He says Indian steel companies are not inking any memoranda of understanding with global partners and are playing mostly in the international spot market. “That sweet spot is available, so people are enjoying,” he says, adding that one of the major sources of demand is the central government’s drinking water supply project. “The largest demand is from water pipes. Large diameter water pipes are in demand under government plans to connect most of the rivers with rural and urban centres to prevent rain water from flowing into the sea,” says Sharma. The allocation for the Jal Jeewan Mission was enhanced more than four-fold to `50,000 crore in this year’s budget compared with ` 11,500 crore in FY2021. “Water supply for all is a big positive for the steel segment,” says Narendran.

The World Steel Association has also projected a rise in demand for finished steel products in India this year as well as in 2022. The demand is projected to grow 16.7% to 104.3 million tonnes in 2021 from 89.3 million tonnes in 2020. In 2022, it is expected to grow 6.8% to 111.4 million tonnes.

Capacity Augmentation

The steel industry has made investment plans in line with demand forecasts.

While JSW Steel will invest ₹30,000 crore by March 2024, JSPL will invest ₹18,000 crore. Tata Steel has said it will stick to its investment guidance of ₹10,000-12,000 crore next year.

“We will augment the Angul capacity from 5.4 million tonnes to 12 million tonnes in two phases at an investment of ₹18,000 crore,” says JSPL’s Sharma, adding that the entire expansion will be funded through internal accruals. JSPL also plans to become ‘net debt free’ by July next year. “We are aiming at cutting debt from ₹11,164 crore in Q2 to ₹5,000 crore by the end of the financial year,” says Sharma.

Sharing details of JSW Steel’s investment plans, Seshagiri Rao says, “We have a capacity of 27 million tonnes. We plan to take it to 36.5 million tonnes by March 2024. In 2017, we had planned an investment of ₹48,000 crore to take us to 27 million tonnes. All projects under that phase have been commissioned. The ₹30,000 crore expansion we are planning now is over and above that.” On debt, he says, “As of now, we have a debt of ₹55,000 crore. It is not big for the size of the company. Our Ebitda in first six months of the current financial year was ₹20,700 crore. If we repeat the same in the second half, we are talking about ₹41,000 crore Ebitda. The overall ratio is comfortable. Cash generation from hereon will be quite significant. We do not want to raise the debt to Ebitda ratio. We are at 1.6, in line with what we are guiding to the market.”

Other Metals

Other metals such as aluminium and zinc are shining too. Credit Suisse recently revised its FY22 LME aluminium price forecast from $1,900 per tonne to $2,670 per tonne. Here, too, one of the reasons is supply side in China, the largest producer.

Earlier this year, Vedanta founder Anil Agarwal had said the group will invest ₹37,500 crore in the next three years in oil and gas, aluminium, zinc, copper and steel. With prices on the upswing, Novelis, the US subsidiary of Hindalco, is planning to expand the downstream business. Nalco has lined up ₹30,000 crore investments by FY2028.

It seems the bull run in metals is not going anywhere soon.

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