Steel stocks up after China announces plans to cut bank reserve requirement ratio

China is the largest consumer of metals in the world, and the market is betting that a reduction in interest rates will spur economic activity in the nation, particularly in infrastructure and housing

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Steel stocks were fired up during January 24’s trading session after the  Chinese central bank governor announced plans to cut the Bank Reserve Requirement Ratio to provide liquidity for the ailing economy.

Shares of companies like Tata Steel, Hindalco, NMDC and Steel Authority of India were up between 3 percent and 5 percent.

Hindalco was up 4.68 percent while Steel Authority of India jumped 5.61 percent and Tata Steel gained 3.69 percent.

China is the largest consumer of metals in the world, and the market is betting that a reduction in interest rates will spur economic activity, particularly in infrastructure and housing. If that happens then Chinese steel companies will be able to sell a good quantity of their production locally, instead of dumping them in international markets.

For the last many months, global steel prices have been subdued, due to a combination of weak demand as well dumping by China. Weak global prices hurt exports for Indian steel makers.

“Chinese steel companies have not been cutting production despite weaker demand. They have only cut it in the second half of the last year despite the losses. If the economic reforms lead to a revival in the real estate and infrastructure sector, then Chinese exports will come off aiding steel pricing across the globe and in turn helping domestic steel companies.” said Tushar Chaudhari, Lead Research Analyst, Prabhudas Lilladher.

Pan Gongsheng, People’s Bank of China governor said the banks will cut the reserve requirement ratio by 0.5 percent on February 5, which will provide $139 billion in liquidity to the economy, according to a Bloomberg report.

According to a Prabhuadas report, domestic demand for steel companies is expected to slow down in Q3 due to moderation in infrastructure spending due to election, hence competitive exports gave a good advantage to these companies.

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