Metal stocks gain from price rises and Chinese troubles

• Almost all the top metal stocks rose in a one-month period with Jindal Stainless and NMDC posting over 20% gains.
• Troubles in China coupled by robust domestic activity is holding up the sentiment, experts say.
• A few analysts believe that the profitability of metal companies will be hit in FY24 as raw material prices remain elevated.

Indian metal stocks have been rallying for the last one month, supported by a flurry of positive macroeconomic data, and an anticipation that steel prices will rise.

Almost all the top stocks in the Nifty Metals Index were trading in the green over a 30 day period — with a few like Jindal Stainless and NMDC rising by over 20%. The exceptions were Vedanta, which was lower, while JSW Steel and Hindustan Zinc registered moderate gains. Nifty metals index also moved up by 5.3% in the last one month.

“Fresh buying is being seen in these stocks as steel prices are rising. Moreover, metal stocks have not moved much in the last two years and in the last ten days they have given a breakout and all the stocks have jumped suddenly,” said Rahul Kalantri, VP of commodities at Mehta Equities told Business Insider India.

An ICICI Securities report said that the prices of steel product Hot Rolled Coil in the traders’ market rose slightly by ₹270 per metric tonne in the week ended August 30, on expectations of demand pick-up and low channel inventory.

“In longs, major steel producers hiked prices for the third time during the month as secondary rebar prices are up 10% MoM on average. India’s export prices rose by $10 per metric tonne week on week though overall prices in South-East Asia remained stable WoW,” the I-Sec report said.

Moreso, bad news in China has also added to the positive sentiment in Indian metal stocks. A few sintering units have been asked to curb operations in Tangshan, and I-Sec says that production curtailments and flat production policy might take centre-stage in the coming weeks.

China’s production cuts can reduce their imports to India and elsewhere, allowing local producers to gain an upper hand.

A volatile Dollar Index has been trading in the negative zone for the last week, which offers support to the rise of metal prices as metals index and dollar index are inversely related.

“We expect dollar index to trade rangebound with negative bias led by US Fed at the fag end of the rate hike cycle; Euro to appreciate against US dollar or remain stable as the European Central Bank (ECB) is likely to increase benchmark interest rates at a relatively faster pace as compared to that of US Fed; cooling off in inflation and global macro recovery,” said a report by SBI Securities.

Source: NSE

Domestic industry on an upswing

Even as China’s economy is in doldrums, Indian economic data has been supportive with the first quarter GDP growth coming in at 7.8% which is higher than expectations. Also, purchasing managers index (PMI) hit a three-month high in August.

Moreso, domestic industry is expected to remain charged due to a pre-election infrastructure activity.

“The Indian government is supporting the domestic industry through various measures like countervailing duties (CVD), PLI schemes etc. End user industries like auto, consumer durables, real estate, infrastructure, cap goods are witnessing healthy growth traction,” said SBI Securities.

A few brokerages however are of the opinion that a rise in raw material prices might hit the profitability of metal companies in the fiscal year of FY24. Coking coal prices have gone up by 14% month-on-month in August.

While domestic industry may hold steady, the demand from global markets is still in the grey zone, even with a stimulus package announced in China.

“There are chances of a recessionary environment in developed countries in the coming year. Although export duty has been nullified by the Indian government, the probability of increase in steel demand globally remains low in our view,” says a report by IDBI Capital.

In the long term, steel companies see a good demand and healthy operating environment as top five players have planned major capex —- spending as much as ₹55,000 crore per annum — that’s twice as much as they spent in the last five years.

Their confidence in the Indian infrastructure story which is where 70% of steel is consumed, adds to the toughening sentiment around metal stocks. Kalantri expects metal sector stocks to give 30-40% returns over a one-year period.