New Delhi / Bloomberg
Until a week ago, India’s metal companies were almost written off by
investors amid the worst price slump in six years. They may be starting to get their sheen back now.
Federal budget proposals on February 29 to boost infrastructure spending by 15 percent and take electricity to every household by 2018 have spurred a rally in local producers on optimism the outlay will drive domestic consumption. Vedanta Ltd., the nation’s biggest producer of base metals, predicts aluminum sales growth to rebound to 9 percent in the year starting April 1, and copper to 5 percent.
Prime Minister Narendra Modi plans to spend as much as 3 trillion rupees ($44 billion) on roads, ports, power plants and other public projects in the year starting April 1, according to budget documents. Aluminum and copper are mainly used in the power sector in the country, with transport, consumer durables and construction accounting for the rest.
“This is exactly following the story of the Chinese economy,” Abhijit Pati, chief executive officer of Vedanta’s aluminum unit, said from Odisha in eastern India. “For the last three decades, China has phenomenally developed its infrastructure. The moment you develop infrastructure, you also grow the metal applications.”
Shares of billionaire Kumar Mangalam Birla’s Hindalco Industries Ltd., the nation’s second-largest aluminum producer, have jumped 15 percent since the budget. Billionaire Anil Agarwal’s Vedanta, which had its worst year on record in 2015, has surged 18 percent since Monday.
“Shares have been rallying because commodity prices have been inching up and because of the infrastructure push in the budget,” said Ashish Kejriwal, a Mumbai-based analyst at Elara Securities (India) Pvt. “All of these companies are leveraged play and any marginal improvement in Ebidta will increase their earnings significantly.”
Shares of these companies are still down this year as a slowdown in China’s economy has led to a surge in supplies of metals from aluminum to zinc, pushing prices recently down to six-year lows. The glut has triggered a rise in trade tensions from the U.S. to Asia. India increased the import tax on aluminum in the budget to 7.5 percent from 5 percent, providing some relief to domestic producers.
The downturn in commodities eroded Birla’s networth last year by $991 million. His wealth now stands at $5.1 billion. Shares of Vedanta gained 7 percent as of 1:59 p.m. in Mumbai on Thursday and Hindalco climbed 5.4 percent. Aluminum prices in London rose 0.2 percent to $1,592 a metric ton and copper rose 0.5 percent to $4,815.
While the London Metal Exchange Index has advanced 3.8 percent this year, gains are not expected to last. Copper and aluminum prices may fall more than 10 percent by year’s end amid the weakness in Chinese demand that’s unlikely to show any recovery in 2016, Goldman Sachs Group Inc said on Feb. 8. The bank lowered its 12-month outlook for copper on the London Metal Exchange to $4,000 a ton from $4,500 a ton and cut its aluminum forecast to $1,350 from $1,550.
Vedanta’s aluminum sales may grow 9 percent in the 12 months starting April 1, compared with almost zero growth this year, Pati said. Copper may grow 5 percent next year from 400,000 tons, P. Ramnath, chief executive officer of Vedanta’s copper division, said. The two metals accounted for about 50 percent of the company’s revenue last year in its basket of commodities, which also include zinc, oil and gas.
“Electrification and new lines contain a lot of copper, so that will definitely boost demand,” Ramnath said in an interview from Chennai. “Spending on infrastructure will have an indirect spinoff for the metals sector.”
Some analysts aren’t as optimistic about the government’s plans.
“These are just long-term stories. The pace of execution that is promised in the budget is never achieved,” said Rahul Dholam, an analyst at Angel Broking Ltd. in Mumbai.
“These are things you can take with a pinch of salt.”
Steelmakers may also benefit as Modi targets 10,000 kilometers (6,215 miles) of national highways in the financial year and upgrading 50,000 kilometers of state highways. India’s steel consumption is poised to accelerate as the country invests in rural infrastructure and manufacturing growth jumps to as much as 12 percent in coming years from the current rate of 8 percent, according to Yi Zhu, an analyst with Bloomberg Intelligence.
Steel producers should benefit from higher demand as India plans to spend 1.21 trillion rupees on railways compared to an average of 481 billion rupees over 2009-14, she said. Shares of Tata Steel Ltd. have jumped 14 percent since Monday to a seven-month high. JSW Steel Ltd. advanced 2.9 percent in the same period.
The proposed spending on infrastructure may not boost steel demand unless project execution rates pick up significantly, according to Fitch Ratings. The country’s steel consumption is estimated to grow 7 percent to 8 percent next fiscal year, it said.