Metals' loss is infrastructure and capital goods companies' gain

Interest rate hikes, however, remain a pet peeve

A decline in global prices of metals - both ferrous and non-ferrous - has brought firms in user industries, such as capital goods and infrastructure (infra), some respite. These companies have been reeling from the impact of commodity inflation for some time now, pushing many to give a bleak outlook on margins.

That scenario is undergoing change, with metals like aluminium, copper, nickel, tin, and steel correcting sharply in recent weeks.

While the metal index on the London Metal Exchange, which tracks base metals like aluminium, copper, lead, nickel, tin, and zinc, corrected nearly 2 per cent in the past five days, it was a sharper fall at 8 per cent in the past month and nearly an 18 per cent drop in three months, according to the data compiled by BS Research Bureau.

Global steel and iron ore prices have seen a 10 per cent and 14.4 per cent decline each in the past five days, reveals the data compiled by BS Research Bureau.

In the past month, the fall has been to the extent of 10.6 per cent (steel) and 11.4 per cent (iron ore). The past three months saw steel and iron ore prices fall 15.1 per cent and nearly 23 per cent globally.

In India, the impact of a global correction in metal prices is beginning to show, with the BSE Metal Index, for instance, falling as much as 6 per cent in five days. In the past month, the index fell 10 per cent, shows the BSE data.

S N Subrahmanyan, chief executive officer (CEO) and managing director (MD), Larsen & Toubro, says that interventions by the government in terms of an imposition of export duty on iron ore and steel, coupled with an import duty waiver on raw materials used by steel makers, augur well for the infra sector.

“Steel is a key input for the infra sector. Definitive corrections in (steel) prices are expected with these much-needed measures by the government as infra and construction companies were getting adversely affected and the cost of new projects was not viable,” said Subrahmanyan.

Vimal Kejriwal, MD and CEO, KEC International, says he sees margins improving nearly 150 basis points on account of a correction in metal prices. He does point to concerns on the interest-rate front, which, he says, may offset gains made due to declining metal prices.

“The central bank has had to go in for two rounds of repo rate hikes to rein in inflation. This has increased the interest cost for companies. On the positive side, however, commodity inflation is cooling off, which is good from a margin perspective,” he adds.

M S Unnikrishnan, capital goods veteran and former MD of Thermax, says the overall interest-rate cycle has been picking up as the Reserve Bank of India looks to tackle inflation.

“While the correction in metal prices globally has to do with a slowdown in China and fears of a recession in the US, the hike in interest rates is a near-term concern. This is because the cost of capital will increase, forcing companies to reconsider their capital expenditure (capex) plans,” he says.

Given the government’s thrust on infra development, Metro, rail, and road projects will continue to grow, providing huge business opportunities to infra and construction companies, observe experts at ICRA. Metro projects alone, they say, can provide business opportunities worth Rs 80,000 crore over the next five years.

Capex plans of companies will, therefore, reflect these order inflows, they say, with a decline in commodity prices aiding profitability.