Metals Monthly. China marginally trims GDP target for CY17. Monthly Update. ICICI Securities Ltd Retail Equity Research. Key highlights of month

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1 Monthly Update Sectoral View Equal Weight Index Performance Return % 1M 3M 6M 12M BSE Metals BSE NSE Source: Reuters, ICICIdirect.com Research Coverage Performance Return % 1M 3M 6M 12M Coal India Tata Steel JSW Steel SAIL Hindustan Zinc Vedanta Hindalco HEG Graphite India Mah. Seamless Source: Reuters, ICICIdirect.com Research Top Pick of the sector Coal India Domestic Steel Production Month on Month (MT) Feb17 YoY % MoM % Finished Steel Production (2) 9.0 (2) Imports (46) 0.6 (19) Exports (15) Consumption (0) Source: JPC India, ICICIdirect.com Research Year to Date (MT) AprFeb 17 AprFeb 16 YoY % Finished Steel Production Imports (38) Exports Consumption Source: JPC India, ICICIdirect.com Research Metal Prices Change (%) 28Feb17 1 Month 3 Month 6 Month 12 Month Zinc 2, Lead 2, Copper 5, Aluminium 1, China (HRC) China (Rebar) Indian (HRC) 37, (All prices in US$/tonne, Indian HRC price in /tonne) Research Analysts Dewang Sanghavi dewang.sanghavi@icicisecurities.com Akshay Kadam akshay.kadam@icicisecurities.com March 10, 2017 China marginally trims GDP target for CY17 Key highlights of month As per media reports, during the month of February 2017 on the back of subdued demand, domestic steel prices have witnessed a decline to the tune of ~ 2000/tonne. Muted demand as well as any likely risk of a fall in global steel prices are likely to cap any growth in domestic steel prices from current levels However, during February 2017, base metals on LME like zinc, copper and aluminium increased 2.8%, 1.4% and 5.8% MoM, respectively. However, in the aforesaid period, lead prices declined 2.6% MoM Exhibit 1: Key events Company /Industry Steel Coal India JSW Steel SAIL Vedanta Event Metals Monthly The Central Board of Excise and Customs (CBEC) extended the antidumping duty (ADD) for two months imposed on cold rolled (CRC) and hot rolled (HRC) steel products exported from various countries including China and Korea RP. The ADD on CRC amounts to US$594/tonne while that on HRC is in the range of US$474557/tonne Coal India reported provisional production and offtake numbers for February Coal production during the month was at 54.3 million tonne (MT), up 6.4% YoY, down 3% MoM. Coal offtake during the month came in at 47.7 MT, up 4.8% YoY and down 7% MoM. For AprilFebruary 2017, coal production was at MT, up 2.2% YoY. Offtake during the period was at MT, up 1.5% YoY Moody's Investor Service has upgraded JSW Steel's rating outlook to Stable from Negative earlier. The credit rating agency affirmed the company's corporate family rating (CFR) and senior unsecured rating at Ba3 As per media sources, the government has approved an outright sale of three special steel units of SAIL, namely Salem Steel Plant, Alloy Steel Plant and Visvesvaraya Iron and Steel Plant. SAIL is scouting for a transaction advisor from consulting firms, investment bankers or financial institutions to manage the disinvestment process CRISIL Ratings has revised the outlook on debt instruments of Vedanta from Stable to Positive on the back of expected strong improvement in EBITDA in FY18. The improvement was driven by a production rampup across verticals and better profitability due to operating leverage and continued focus on reducing cost of production The board of directors of Coal India has approved an interim dividend of 18.75/share for Coal India FY17. The government, which holds ~79% stake, is likely to receive ~ 9200 crore from the dividend payout Hindalco has raised ~ 3350 crore (US$500 million) through its QIP. The company allotted Hindalco the equity shares at /share (offering no discount) Tata Steel has clarified that it continues to engage in constructive discussions with Thyssenkrupp regarding a potential merger of the steel business. However, until a definitive Tata Steel agreement is reached, there can be no assurances that these discussions will result in a transaction Source: ICICIdirect.com Research Actual capacity cuts in China in CY17 remain key monitorable In its National People s Congress (NPC), China has set a GDP growth target of around 6.5% for CY17 (full year growth in CY16 came in at 6.7%), which is likely to have a bearing on commodities, in general. Furthermore, China has also planned capacity cuts in both the steel and aluminium sectors. Going forward, effective implementation of planned capacity cuts is likely to be the key monitorable.

2 Exhibit 2: World crude steel production In Million Tonne World Crude Steel Production Chinese Crude Steel Production Indian Crude Steel Production Rest of the World Source: World Steel Association (WSA), ICICIdirect.com Research For January 2017, world crude steel production for 66 countries reporting to World Steel Association (WSA) was at 137 million tonne (MT), up 7.0% YoY. Crude steel capacity utilisation ratio in January 2017 was at 68.5%, up 340 bps compared to 65.1% in January For the month (January 2017), Chinese crude steel production was at 67.2 MT, up 7.4% YoY. As per media sources, the Chinese government has ordered steel and aluminium producers to curb output during winter. The government has asked steel producers to halve production in four provinces Hebei, Shanxi, Shandong, Henan as well as Beijing and Tianjin. Exhibit 3: Indian steel scenario In Million Tonne Feb17 Finished Steel Production Finished Steel Consumption Finished Steel Imports Finished Steel Exports Source: JPC India, ICICIdirect.com Research *Provisional Numbers India turns net exporter in April 2016Feb 2017 Among all major steel producing countries, India has emerged in a sweet spot reporting moderate growth in demand compared to the decline in other major steel producing economies. India s finished steel consumption witnessed 3.4% YoY growth in April 2016February Finished steel consumption during the period was at 76.2 MT against 73.7 MT in April February Consumption during January 2017 was up 3% YoY to 7.3 MT down 0.2% MoM. The measures taken by the Indian government enabled import substitution and cutting down the cheap influx of metal, reducing the gap between imports and exports. Indian finished steel exports were up ~78% YoY to 6.6 MT during April 2016February 2017 while imports declined ~39% YoY to 6.6 MT. Page 2

3 Exhibit 4: Coking coal prices 350 After rallying from US$95/tonne during midjuly 2016 to US$308/tonne during midnovember 2016, the spot price of prime hard coking coal (fob Australia) has cooled off since the start of December Over the last couple of months, spot prices of hard coking coal have declined 48% (US$308/tonne as on December 1, 2016 and US$161/tonne as on February 28, 2017) $ / tonne Feb17 Exhibit 5: Chinese crude steel production China s economic planning agency aims to cut 50 million tonne (MT) steel capacity and 150 MT of coal output in CY17. In the preceding year, China had exceeded its capacity cut target. However, majority of production cuts came from idled capacity. Despite the production curbs, Chinese steel production increased in CY16. While the planned capacity cut in steel augurs well for the sector, effective implementation holds the key Million Tonne Source: Company, ICICIdirect.com Research Exhibit 6: Movement of Chinese exports & rebar prices For CY16, Chinese exports were at 109 MT, down 3% from that of MT in the corresponding period. On a monthly basis, Chinese exports, after peaking in June 2016 (10.9 MT) have declined gradually. Exports during February 2017 were at 5.8 MT. With declining exports, Chinese steel rebar prices witnessed an upside in prices. During the peak of exports (June 2016), rebar prices were at US$382/tonne. Post the decline, rebar prices increased to US$540/tonne, up 41% In Million Tonne $ / tonne Feb17 RHS: Exports (MT) LHS: Rebar ($/tonne) Page 3

4 Non ferrous metals... Zinc Exhibit 7: LME Zinc (price and inventory movement) During February 2017, average zinc prices were up 4.8% MoM. The strong footing in zinc prices over the last couple of months; can be attributed to depleting supply on account of mine closures. According to International Lead and Zinc Study Group (ILZSG), CY16, global zinc output declined leading to deficit of 286 kilotonne (KT). On the flip side, zinc consumption rose 3.6% YoY influenced by Chinese demand 3, , , , , , , , , ,000.0 Feb17 (In US$/tonne) 700, , , , , , ,000 (In tonne) Inventory Prices During February 2017, average aluminium prices were up 3.9% MoM. In order to curb increasing pollution levels, the Chinese government has mandated a production cut during winter wherein the aluminium capacity is likely to be cut by ~30% and alumina by more than 30%. Aluminium prices are likely to see an uptick in the backdrop of Chinese capacity cuts Aluminium Exhibit 8: LME aluminium (price and inventory movement) (In US$/tonne) 2,200 2,000 1,800 1,600 1,400 1,200 1,000 Feb17 Inventory Copper Exhibit 9: LME Copper (price and inventory movement) Price 6,000,000 5,000,000 4,000,000 3,000,000 2,000,000 1,000,000 (In tonne) During February 2017, average copper prices were up 3.2% MoM. Copper prices during the month reached the level of US$6000. The push came in on the back of the strikes announced at Chile s Escondida potentially affecting supply (In US$/tonne) 7,000 6,000 5,000 4,000 3,000 2,000 1, , , , , , , ,000 50,000 (In tonne) Inventory Price During February 2017, lead prices were up 3.1% MoM. Global lead mine production declined 1.3% YoY during CY16 primarily due to lower output from Australia, India and Mexico. However, refined lead metal supply exceeded demand by 11 kilotonne (KT) during the aforementioned period Lead Exhibit 10: LME Lead (price and inventory movement) 3,000 2,500 2,000 1,500 1,000 (In US$/tonne) Inventory Feb17 Price 300, , ,000 (In tonne) Page 4

5 Exhibit 10: Valuations: Global peers Particulars Valuations: Global Companies CY 17 CY 18 CY 17 CY 18 CY 17 CY 18 BHP Billiton Ltd USD , Fortescue Metals Group Ltd USD , Rio Tinto Ltd USD , Vale SA BRL , ArcelorMittal USD , POSCO KRW , United States Steel Corp USD , Nucor Corp USD , JFE Holdings Inc JPY , Gerdau SA BRL , Angang Steel Co Ltd CNY , Alcoa Corp USD , Norsk Hydro ASA NOK , United Co RUSAL PLC USD , KAZ Minerals PLC USD , Southern Copper Corp USD , Antofagasta PLC USD , Lundin Mining Corp USD , Currency CMP M.Cap (US$ Mn) PE (x) EV / EBITDA (x) ROE (%) Page 5

6 ICICIdirect.com coverage universe (Metals & Mining) Company CMP M Cap EPS ( ) P/E (x) EV/EBITDA (x) ROCE(%) ROE(%) ( ) TP ( ) Rating ( Cr) FY16 FY17E FY18E FY16 FY17E FY18E FY16 FY17E FY18E FY16 FY17E FY18E FY16 FY17E FY18E Coal India Buy 197, Tata Steel Hold 139,192 (23.1) NA (7.3) JSW Steel Hold 42, SAIL Hold 24,473 (10.0) (5.9) (0.6) NA NA NA NA (7.9) (2.0) 2.1 (10.0) (6.5) (0.7) Hindustan Zinc Hold 123, Vedanta Hold 74, Hindalco Hold 39, Graphite India Hold 2, HEG Hold 879 (3.8) (8.0) 6.1 NA NA Mah. Seamless Hold 2, Source: Company, ICICIdirect.com Research Page 6

7 RATING RATIONALE ICICIdirect.com endeavours to provide objective opinions and recommendations. ICICIdirect.com assigns ratings to its stocks according to their notional target price vs. current market price and then categorises them as Strong Buy, Buy, Add, Reduce and Sell. The performance horizon is two years unless specified and the notional target price is defined as the analysts' valuation for a stock. Sector view: Over weight compared to index Equal weight compared to index Under weight compared to index Index here refers to BSE 500 Pankaj Pandey Head Research pankaj.pandey@icicisecurities.com ICICIdirect.com Research Desk, ICICI Securities Limited, 1st Floor, Akruti Trade Centre, Road No 7, MIDC, Andheri (East) Mumbai research@icicidirect.com Page 7

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