Its a great time to be in the steel and copper sector: prices are rising at ridiculous rates. In a note sent to clients on November 26, investment analyst Mohsin Ali noted that increased demand was having repercussions, both internationally and locally.
International scrap and copper prices increased by 11% since October 2021 to currently hover around $488 per ton and $9,932 per ton respectively compared to the fiscal year to date average of $473 per ton and $9,485 per ton. Much of this increase is because of a power shortage and supply concerns which caused smelters to go offline from Chile to China.
However, there are concerns over future metal supply cuts may still linger where uncertainty on new recycling restrictions in Malaysia have caused the scrap market to tighten considerably, increasing dependence on refined metal as global demand started to pick up ahead of the winter season. Still, Ali also noted that impressive Chinese export growth in October had counterbalanced some of the pressure mounting on Chinese local manufacturers because of the enormous power shortage, supply-side disruptions and reappearance of Covid-19 cases in China.
“Moving forward, strong Chinese exports in October 21 and booming global demand ahead of winter holiday season could keep industrial metal prices upward in the short run,” said Ali. He also said that the $1 trillion infrastructural bill had been passed by US Congress in November 2021 which was bound to keep copper and other metal prices on a upward trajectory in the medium term.
Meanwhile, closer to home, local rebar prices increased by 9.7% month-on-month to Rs195-197,000 per ton in November 2021. There are three reasons for this: strong retail demand in the construction sector, in both north and south; higher freight cost; and the rupee’s devaluation of 2% since October 2021.
The lower price competition in the local market, due to high retail demand, have also provided room for local rebar manufacturers to pass on cost swiftly. This was reflected in the first quarter of 2022 financial results of more steel players. Both Mughal Steel and Amreli Steel performed well, up 4.8% in November 2021, compared the KSE-100 rise of 0.6% in November 2021.
“Likewise, we expect earnings to remain robust in the near term as, higher rebar prices and pricing power benefits local manufacturers in passing through the input cost, translating into better margins,” said Ali.
Out of all the steel players, Mughal Steel in particular stood out. Its topline registered a growth of 81% year-on-year to Rs14 billion in the first quarter of fiscal year 2022. Similarly, its topline grew 65% to Rs44.9 billion in fiscal year 2021. Most of this was because of the 40% year-on-year increase in local rebar prices in the first quarter of fiscal year 2022, and 45% year-on-year increase in copper price in fiscal year 2021.
Mughal Steels re-rolling capacity for rebars increased to 430,000 tons in fiscal year 2021 against 150,000 tons in fiscal year 2020. The company’s billet capacity stood at 419,000 tons in 2021 and increased by 79,000 tons in FY21.
In a recent analyst briefing, the company’s management said that the uptick in construction demand is
expected to continue which will stimulate long steel demand, which is expected to increase by up to 7% in fiscal year 2022. This would mean the ferrous demand for Mughal would increase by 25% year-on-year in fiscal year 2022. The management also said that international scrap prices has helped graded steel in gaining more market share as compare to ungraded steel because of lower price delta and higher retail demand.
The company is also well placed, since it able to bulk buy its raw material to hedne against rising freight and raw material prices. This will mean its gross margins should be stable.
And when it comes to copper, the company again has an advantage, having established a brand name. It is able to sell its products to a mere 3% discount to the benchmark LME index in contrast to the average discount of 8-10%.