Heavy rains and floods in China and Europe have recently dominated headlines around the globe. Most-affected was China’s Henan province, home to one-tenth of country’s total agriculture output and 36% of China’s total primary Lead capacity (used in batteries) and 15% of recycled Lead capacity.
Western Europe (Germany, Belgium and the Netherlands) embraced highest rainfall in decades, causing transportation and production disruption in the Rhine valley – a major shipping route for commodities in Northern Europe. Moreover, Rhineland-Palatinate and North Rhine-Westphalia region (areas most hit in Germany) are home to manufacturing facilities of top steel producers.
Disruptions in steel supply chain have begun to impact raw material prices with scrap/ HRC prices down 5.1% and 2.5% respectively. Analysts see positive (through potential inventory gains in medium run) to neutral impact on long steel manufacturers where every US$5 drop in scrap prices has a positive impact of Rs0.9/share and Rs1.0/share on ASTL and MUGHAL respectively in FY22 (assuming no change in rebar prices).
CRC-HRC spread has also improved to US$83/ton as compared to US$50/ton in July 2021 — positive for ISL and ASL. Lead prices were up 7% from mid-July 2021 which bodes negatively on margins of local battery manufacturers with limited pass-on ability. To highlight, every 5% change in lead prices reduces gross margin of EXIDE/ATBA by 250bps and 190bps respectively.
Lately, heavy rains and floods dominate headlines around the world. In China, torrential rains have catastrophically hit Henan province, home to one-tenth of country’s total agriculture output. The region also engulfs 36% of China’s total primary lead capacity, and 15% of recycled lead capacity. Moreover, Aluminum players in the region have been pushed to halt or reduce production levels while transportation of mining metals from Inner Mongolia and Shanxi stands disturbed. Western Europe (Germany, Belgium, and the Netherlands) embraced highest rainfall in decades, causing transportation and production disruption in the Rhine valley – a major shipping route for commodities in Northern Europe. To highlight, Rhineland-Palatinate and North Rhine-Westphalia region (areas most hit) are the top exporting regions occupying 25% share in total exports of Germany. These areas are also home to manufacturing facilities of top steel producers namely, ThyssenKrupp steel plant in Ruhr and Arcelor Mittal.
Developments in Germany could have a significant impact on steel prices (both long and flat) where from perspective of long steel players lower demand as a result of closure of steel manufacturing facilities/end product supply chain disruption, have begun to impact scrap prices (down 5.1% since mid-July 2021, also influenced by policy shift from China with manufacturers cutting down production by 6% to curtail soaring scrap prices) whereas in the medium run repair work in affected areas both in China and Europe could put upward pressure on scrap prices. Hence, analysts see positive (through potential inventory gains in medium run) to neutral impact on local long steel manufacturers (ASTL, MUGHAL, AGHA, ITTEFAQ) where every US$5 drop in scrap prices has a positive impact of Rs0.9/share and Rs1.0/share on ASTL and MUGHAL respectively (assuming no change in rebar prices). Within flat steel: 1) seasonal slowdown, 2) reduction in output with inventories piled up and order books full till December end this year and 3) disrupted steel supply chain, has forced major players in Europe to curtail future buying until clarity emerges. This is starting to reflect in benchmark HRC prices indices where HRC NW EUROPE/China/North America prices have come down 2.7%/2%/2% to US$1349/919/1751/ton respectively, therefore, increasing CRC-HRC spread (Currently US$83/ton as against average of US$50 in July 2021) — positive for ISL and ASL.
Turning our focus to China, limited impact on agriculture throughput is expected (9% of crops area affected). However, with Henan being the major producer of Lead, supply disruptions has increased global lead prices by 7% since mid-July 2021. This bodes negatively for Pakistan’s battery manufacturers (EXIDE, ATBA) having reliance on China for lead imports, potentially impeding their raw material supply chain in the near term. Further, we see limited pass-through ability (Lead occupies 60% share in raw material costs) of these manufacturers, considering low pricing power in primary market (Auto assemblers are already reeling cost pressures from higher CRC prices, and currency devaluation) and COVID-related lockdown affecting secondary market sales. To highlight, every 5% change in lead prices reduce gross margins for EXIDE and ATBA by 250bps and 190bps respectively.
Additionally, aluminum/copper prices have also surged amid global supply crunch with aluminum/copper plants located in flood affected region running at reduced capacity because of insufficient coal supply where we see neutral impact on PABC given price pass-on built in agreements, while stronger copper prices should benefit MUGHAL.
[box type=”shadow” align=”” class=”” width=””]Strike call at copper mine in Chile
Workers at the world’s biggest copper mine of Chile, Escondida, have approved a strike after rejecting the final contract offer proposed by multinational owners BHP. Chile is the world’s top producer of copper, making up 28% of global output. The mineral accounts for 10-15 percent of the South American country’s GDP, with much of it exported to China, the world’s biggest consumer.
Escondida workers staged a 44-day strike in 2017, the longest in the history of Chilean mining. The strike caused US$740 million losses for the company. The Escondida mine is located in the world’s driest desert, the Atacama in northern Chile, at more than 3,000 meters (10,000 feet) in altitude. It is the same area where in 2010 some 33 men were trapped 700 meters underground for 69 days following a cave-in at the Copiapo mine.[/box]