Commodity and Cyclical Plays

Investing Strategies
1111

Any pointer to the reliable source to track the chinese monthly steel export data?

1112

Mr. @Rakesh_Arora ji,
Are you the one presented “Steel sector basics” with Varinder bansal?

Thanks for yours presentation, it is very insightful. Could you clarify my questions as below.

  1. Is there any global factors that is causing commodity price rise due to the liquidity and low interest rates ( RE & Infra push across the globe due to low interest rate)?
  2. As china is big player in steel with 53% of global capacity and they intentionally reduce the production if their GDP growth or ore prices reaches certain level. Is it better to look at non-ferrous commodities to get more benefit of global boom as china can’t control production here?
  3. As china has huge capacity, how they are securing the raw material like iron ore. Do they have required mines? As per the presentation their 90% capacity is BOF and only 10% is EAF so they don’t depend on scrap metal I believe.
1 Like
1113

Ravindraji

  1. As is usually the case, multiple factors are at work. Obviously China’s push for infrastructure build to prop economy during Covid times is the main reason. But US dollar weakening and disruption in production of raw material like iron ore is also helping the cause.
  2. China is big in everything, it is 50% of aluminium and zinc too. So doesn’t change the outlook. Most commodities trade as a pack due to substitution impact.
  3. They import 70% of their iron ore requirement. Largely from Australia and Brazil. Scrap based capacities are now a focus, but it will take few decades to gain prominence.
5 Likes
1114

I guess NMDC capacity is on higher side with its Donimalai mine. Royalty issue and Steel plant are hindrance else could be easily doubled as of now. Any update about NMDC pellet plant in Karnataka?

1115

The data in presentation is FY20. NMDC claims it can do 50mtpa, but they have been claiming it for years now. Btw I visited NMDC pellet plant in 2014 and it was supposed to be ready. Haven’t seen it’s impact on earnings till date

1 Like
1116

But without donimalai there were producing about 32-33MT and with donimalai it’s at least 40MT. I last hear in there AGM (Oct20), there were some bottlenecks in its pellet plant. But the same is commissioned in FY2017. Even they are separately reporting in segment reporting though utilization are very low (don’t know why). Pellet plant capacity is I guess 1.2 MT

1 Like
1117

Very insightful presentation and objectively presented. Many thanks @Rakesh_Arora @Rakesh_Aggarwal

If I understand correctly, the rise in imports is due to substitution of steel billets for iron ore. In that case, this spurt will be short lived as both China and Australia realize both of them are losers in this game and resolve their political differences. There does not seem to be any structural demand shift. Though China might have increased infra spend to revive the economy out of Covid driven slowdown, they are unlikely to overdo it, having learnt their lessons from the previous boom of early-2000s.

4 Likes
1118

All possible, but longer it lasts more the conversion from debt to equity for steel companies.

1 Like
1119

Hi Rakesh,

Many thanks for your presentation.

Could you please answer the below queries?

  1. NMDC is debt free and having highest capacity of iron ore. However, the street seems not much enthused. Apart from being a government company and royalty sharing issue with states, is there anything else wrong with NMDC? My understanding is, if iron ore price increases by 80%, the increased amount should directly add to the bottom line.

  2. Based on your understanding, do you see any advantage to graphite electrode players(HEG,Graphite India) during this commodity cycle ?

Thanks.

1 Like
1120

Hi, you are right in your assumptions on NMDC. And the stock has caught up, off late with its’s peers. However because it is debt free, the market cap is more than EV. In this case the sensitivity of profits to mkt cap is lower than the other steel companies with higher leverage. Secondly, steel companies did drop much lower in March due to high debt burden and possible bankruptcy risks, so there is a PE re-rating also happening.

See once commodity cycle goes up everyone benefits, so that is applicable to graphite electrode players too. But I have no view on individual companies.

5 Likes
1121

China is very less impacted with Covid. Every country have to increase infra spending to revive their economies from pandemic. India is also getting ready for huge infra spend. It will be interesting to see where this commodity cycle will end.

1 Like
1122

Based on some scuttle butt with a printing press operator in UP:

  1. Demand for printing paper has mostly recovered to pre-covid levela in South India. But North India still only 15-20% of pre-covid level still
  2. however they expect demand in North is near bottom and should pick up soon
  3. Scrap paper prices have shot up due to unavailability. This puts pressure on paper mills how use waste paper as main raw material
  4. sugarcane crop harvest is soon and hence availabilty of bagasse should increase shortly

Although difficult to draw direct stock implications, thought it may be of use to folks tracking paper sector.

Admins pls remove if necessary

4 Likes
1123

This article seems to gauge the situation on the ground with respect to iron ore supply.

Being in Australia, I can tell that China clearly is pissed off with Australia’s approach to probe the virus origins. China is the biggest trading partner for Australia ~35%. The higher education sector in Australia is kind of dependent on students coming from China. Luckily, Australia profited even though their biggest customer(China) reduced the amount of iron ore intake last year. Thanks to significant demand from other countries and also reduced supply due to dam issue in Brazil. China is just waiting to call the shots by trying to procure the ore from other sources - Guinea , Mongolia etc so that they can convert this supplier’s market to buyer’s market.

Disclosure - Invested in NMDC, JSW Steel, HEG & Graphite India

1 Like
1124

Just for your information NMDC can only export to Japan and Korea under Long term agreements. So in case NMDC have any plan to export to China, export duty of 30% is applicable.

4 Likes
1125

Hi Rakesh, nice presentation!
wanted to check on facts with respect to a particular company with you - Jindal Saw. they have an iron ore mine which gives 1.5MT pa in Rajasthan. They claim that their realizations are about INR 1000/- higher on account of shortage of iron ore available in that region although the quality of the mine is inferior. Is the transportation cost of iron ore that high, that a higher price to that extent be sustained?

1 Like
1126

Navneet, your assessment is correct, Jindal Saw indeed gets higher realisation due to freight advantage and it will be sustained. There is indeed differential between iron ore pellet prices depending on the distance. Same can be seen if you compare prices of pellet in Raipur vs say Barbil in Orissa. But please note that when there is shortage which is the case now, people buy whatever they can lay their hands on, so these differences can get reduced.

1 Like
1127

Any guidance on investing in sector funds. Any pointer to portal, website, group that could guide on that is required.

1 Like
1128

Hi @Rakesh_Arora - Very insightful interview to Varinder…I do have exposure to Steel sector and want to track the China’s monthly volume for iron ore and steel import. Will you be able suggest the portal/url to track this on monthly basis please.

Thanks
-Manohar

1 Like
1129

Hi, there are multiple sites, for China Mysteel.net is the best but everything is behind a subscription which are prohibitively expensive. I just read news articles published by various industry website to keep myself abreast. Best is to use google alerts with keywords like “China Steel Exports” etc and you will get all news in your inbox. It can get a bit overwhelming as most of it could be repeat or useless but it’s free!

5 Likes
1130

Hi Rakesh,

Very nice presentation esp i dint know much about God power & Ispat. what is your view on Aluminium prices sustaining at this level or does it have the leg to go further
How about NALCO which is still at <1 P/BV but with huge operational leverage and cost adv over others, and no debt, what kind of EBITDA per tonne at current USD 2020 per tonne of Al will NALCO achieve ?

Thanks
Balaji