Karachi, August 05, 2021 (PPI-OT): Pakistan Metals: Global Floods disrupt metal supply chains – price volatility expected

Heavy rains and floods in China and Europe have recently dominated headlines around the globe – we map out regions most affected and potential economic fallout on commodities. Most-affected, China’s Henan province, is home to one-tenth of country’s total agriculture output and engulfs 36% of China’s total primary Lead capacity (used in batteries etc.) and 15% of recycled Lead capacity.

Moving to Europe, where 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%/2.5%. We 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 PkR0.9/sh and PkR1.0/sh on ASTL and MUGHAL respectively in FY22 (assuming no change in rebar prices). CRC-HRC spread has also improved to US$83/ton vs. US$50/ton in Jul’21 – Positive for ISL and ASL.

Lead prices are +7% from mid-Jul’21 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 250/190bps.