Are Indian bourses changing their tune to heavy metals?

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Are Indian bourses changing their tune to heavy metals?
Labourers in a factory. Investors are eyeing an opportunity to profit from investing in metals, specially steel, and mining stocks in India judging by trends.Courtesy: ANI

Robust Chinese demand and a weak US dollar are propelling metals, especially steel, prices higher. Shares of most Indian steel companies have rallied over the past couple of months as a result. This is a window for investors, including those from abroad, to tap into for high returns away from the ravages of a Covid-hit economy.

In an economy ravaged by the second wave of the Covid-19 pandemic, metals and mining stocks offer investors, including foreign investors, an opportunity to earn good profits away from the headwinds of a coronavirus-affected economy.

On India’s largest stock market, the National Stock Exchange (NSE), the metal index was ruling almost a clear percentage point higher compared to a 0.45 per cent fall in the benchmark Nifty 50 Index on Monday.

Steel stocks dominating the bourses

On the BSE, the public sector SAIL jumped from Rs 84.75 on April 12 to Rs 146.25 at the close of trading on Monday, a 72.57 per cent rally. Other companies such as Tata Steel, Adani Enterprises, Welspun Corporation and Apollo Tubes rose between 1.5 per cent and 5 per cent on Monday and experts said all of them are poised to rise further.

In fact, over the past couple of months, the stocks like JSW Steel, SAIL, Tata Steel, Adani Enterprises and Jindal Steel have soared 81.5 per cent, 56 per cent, 45 per cent, 39 per cent and 31 per cent, respectively. Over this period, the Nifty Metal Index has soared 27 per cent compared to a 0.7 per cent gain in the main Nifty 50 Index.

Investors will take confidence from the fact that the metals rally in India is part of a global trend of prices touching new highs on the back of robust Chinese demand and a weak US dollar.

What will give investors confidence is the fact that the rally in metals stocks in India is part of an international trend of metal prices touching new highs on the back of robust Chinese demand and because of the weakness in the US dollar.

The demand for steel is being led by the auto industry, resulting in higher steel shipments and improved margins.
The demand for steel is being led by the auto industry, resulting in higher steel shipments and improved margins.Courtesy: ANI

ArcelorMittal points to rebound for steel in India

ArcelorMittal, the world's largest steelmaker, reported higher than expected first-quarter earnings last week after what it said was its strongest quarter in a decade according to Reuters.

The company said it expects global steel demand to grow by between 4.5% and 5.5% this year, with inventories low after prolonged destocking, capacity utilisation rising and steel spreads healthy. Excluding China, that growth would be 8.5% to 9.5%, with a strong rebound expected in India.

The Luxembourg-based company reported first-quarter core profit (EBITDA) of $3.24 billion, more than three times the $967 million a year earlier and higher than the $2.97 billion average forecast in a company poll.

"The first quarter of this year has been our strongest in a decade," CEO Aditya Mittal said in a statement. "We are seeing a continuation of the positive market dynamics of the fourth quarter and have been steadily bringing back production in line with the demand recovery, which is supported by low inventory levels through the value chain."

The group said it had benefited from a strong recovery in steel demand led by the auto industry, resulting in higher steel shipments and improved margins.

The BSE has recorded impressive gains in metals and ArcelorMittal has envisaged a strong rebound in India.
The BSE has recorded impressive gains in metals and ArcelorMittal has envisaged a strong rebound in India.Courtesy: ANI

China has cut export rebates

In a clear sign that Chinese demand is growing rapidly, Beijing has cut export rebates on steel products such as stainless steel, cold rolled sheet, bars, rods, hot rolled coil (HRC), welded and seamless pipes and galvanized plates, with effect from May 1.

This rebate, which was at 13 per cent, has been scrapped completely. China has also done away with import duty on pig iron and scrap while raising its export duty on high silicon steel to 25 per cent from 20 per cent earlier, ferro chrome to 20 per cent from 15 per cent and foundry pig iron to 15 per cent from 10 per cent. This clearly indicates that the Chinese authorities expect domestic steel demand to remain at elevated levels in the short to medium term, at least.

A worker cuts steel rods outside a workshop at an iron and steel market in an industrial area in New Delhi. Global steel demand to grow by between 4.5% and 5.5% this year with a strong rebound from India.
A worker cuts steel rods outside a workshop at an iron and steel market in an industrial area in New Delhi. Global steel demand to grow by between 4.5% and 5.5% this year with a strong rebound from India.Courtesy: Reuters

China unlikely to distort global steel prices

“We infer this development as a long term positive for global steel prices as this indicates that China may not distort world steel prices amid any slowdown. Additionally, it shows China's willingness to cut steel production (serious about environmental issues) and meet domestic demand (not hampering GDP growth) via lower export,” noted analysts at Centrum Broking.

‘The current slowdown in domestic demand may not hamper the profitability of primary steel producers as it is more profitable to exports in Q1FY22,’ a Centrum Broking report said.

Price trends in India’s domestic market seem to suggest that there could be room for a further uptick in prices. HRC prices in the country are quoting at a 13 per cent discount to export prices, indicating that a further rally may be on the cards.

Export markets compensate for domestic slowdown

“The current slowdown in domestic demand may not hamper the profitability of primary steel producers as it is more profitable to exports in Q1FY22. We will soon revise our number upwards to factor in higher steel prices,” the Centrum Broking report added.

This is where investors have to be careful. Even though metal prices may be rising – with enough room for a longer rally – the potential for the stock market to track the commodities market could be patchy.

Market participants said investors have now cottoned on to the trend of rising metal prices and increased their allocations in favour of metals stocks. So, while there might still be some upside left in the overall basket, investors have to be careful about the stocks they choose to put their money in.

That then, would seem to be the decisive mantra. There is still some juice left in this metals rally.

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