Budget’s policy direction key for metal producers
In April-February 2012, steel consumption has risen by just 5.2% year-on-year, and production has slowed down to match consumption
~~Ravi Ananthanarayanan

Metal companies have been hit hard by a global slowdown that has affected output and prices, even as input costs have not fallen commensurately. Rising interest rates have not only hit the cost of financing working capital, but also made project finance more expensive. Projects have also been hit by delays due to environmental and land acquisition related issues. Much of what ails the sector therefore lies outside the ambit of the budget’s tax proposals. Can the budget then offer any real hope to investors in these companies?
A recurring concern among economy-watchers is that capital investments in the economy have taken a backseat. That has had an indirect impact on metals companies. Apart from sectors such as automobiles that are consumption-oriented and also consume metal, key sources of demand for metals are from infrastructure, real estate and industrial projects.
In April-February 2012, steel consumption has risen by just 5.2% year-on-year, and production has slowed down to match consumption. In April-December 2011, aluminium production was up by just 3.3%, while copper metal production was up by 1.7%. Those are not growth rates to be proud of, especially when most domestic companies have expanded capacity and are set to expand further.
The government will be certain to make the obligatory noises about infrastructure creation and creating jobs through industrial growth. But investors should be looking at how the government proposes to spur investment-related spending. If it creates space by curbing growth in consumption-related spending, or uses tax proposals to spur investment, capital investments may actually get a boost. Some clarity on the government’s intent to pass key legislation—such as on mining bill and land acquisition—will also provide more certainty on the policy front.
The budget’s tax proposals could provide some pain or relief. If the excise duty rate is rolled back to its pre-2008 levels, meaning an increase of 2 percentage points, it will affect all sectors including metals. There is talk about an import duty exemption for thermal coal, and an increase in duty on hot rolled coils from 5% to 10%. If it happens, integrated steel producers will benefit. Changes in freight rates will also affect costs.
Unless the government does something dramatic, indirect tax proposals are likely to play a secondary role compared to policy direction in determining the reaction of investors in metal stocks.

Courtesy: Live Mint