BSE Metal index soars 10% on hopes of demand revival despite global headwinds

BSE Metal Index advanced 11 percent in the last month amid expectations of rise in demand in domestic markets going forward

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The BSE Metal Index posted a 10 percent surge last month, despite rising raw material costs that could dent margins, and weak demand in China.

Hot rolled coil (HRC) prices in India remained high for the tenth straight week, while rebar prices surged again, after lying low for three months, to the level last seen in Jun 2023. On the other hand, prices in traders’ markets are still at Rs 56,600 per tonne in August, indicating the possibility of a further uptick. Steel prices in China fell 6 percent month-on-month, and 9 percent on-year to $550 a tonne, said analysts.

Raw material prices increased sharply in August. Coking coal, which is now priced 14 percent higher at $232 a tonne, is expected to firm up to anything between $230 and $250 FOB Australia in the second half of this year. Domestic iron ore prices increased 14 percent MoM to Rs 7,400 a tonne.

The BSE Metal Index advanced 11 percent last month amid expectations of a rise in demand in domestic markets going forward. Metal stocks such as NMDC surged 23 percent, Coal India 18 percent, Tata Steel 7 percent, APL Apollo Tubes 5 percent, Hindalco Industries 4 percent, Steel Authority of India 3 percent, and National Aluminum Co advanced 1.1 percent.

China relief measures

Market sentiment improved on the back of Chinese government’s measures to revive the economy. These included easing the one-year loan prime rate and relaxing mortgage policies to boost the economy and stabilise the real estate market. While these actions may benefit the real estate sector directly, metal stocks have responded positively, expecting increased demand in China. There are no clear signs of a demand recovery yet on ground though, analysts said.

Analysts also attributed the recent surge in metal stocks to the expectations of an increased demand in the domestic market. This rise is due to construction activity starting earlier than anticipated, driven by a lacklustre monsoon in August 2023, and the pre-election infrastructure development ahead of the general elections, which is expected to boost demand.

According to an ICICI Securities report, Tata Steel and JSPL have raised the list price by Rs 2,000-2,500, while SAIL has taken a hike of Rs 750. As a result, the list price for rebar works out to Rs 56,000-58,000, while traders’ market is still at Rs 54,000-55,000 on the average. In the secondary market, pellet price is back at Rs 10,000, which is a six-month high level. The secondary rebar price is also back to Rs 51,160 on average- highest level since May 2023.

“Amid rising Chinese domestic and export steel prices, we believe the recent price hikes taken by major steel players are likely to boost margins as domestic demand stays robust and channel inventory is stable”. said ICICI Securities in its latest note.

US Fed rate pause expectation

The metals market sentiment also improved due to the recent US jobs report showing a cooling labour market, potentially pausing rate hikes by the Federal Reserve this month. With non-farm payrolls rising by 187,000 in August and hourly earnings aligning with expectations, analysts are closely monitoring upcoming US data releases for Fed insights.

While September suggests a pause in rate hikes due to positive signals on inflation and labour costs, strong activity data keeps the possibility of further increases open. Market indicators show a 50 percent chance of a final hike, but analysts believe rates have likely peaked. Should US interest rates stay high for an extended period, it could lead to a stronger US dollar, reduced investor confidence, and consequently, lower metal prices, analysts said.

Some analysts anticipate subdued operating profits for metal firms. IDBI Capital expects steel companies to experience limited operating profit growth in FY24. This caution arises from the possibility of a recessionary environment in developed countries over the next year, coupled with a weakened Chinese economy due to lockdowns in various regions. Despite the India nullifying export duties, the outlook for increased global steel demand remains pessimistic in their view.