Metal stocks fire up on hopes of lower Chinese production, easing input costs

Metal stocks, which have been on a declining trend for the past three months, are seeing a rebound on easing coking coal prices, lower Chinese production and better domestic prospects. The Nifty Metal index was the best performer among all sectoral indices on the NSE on March 1.

The index has fallen 3 and 12 percent in the past one week and month, respectively, and slumped 19 percent in the past three months.

“Metal prices and input prices primarily impact the performance of metal companies and have been volatile over the past few quarters considering China lockdown and then lifting of restrictions, and global growth concerns,” said Divam Sharma, Founder at Green Portfolio, SEBI Registered Portfolio Management Service Provider.

But the Indian metal companies are now in a better position than the global peers considering high domestic demand and thrust on capital expenditure, he said.

Coking coal

One of the main reasons for a recovery in sentiment for metal stocks today is a sharp drop in prices of coking coal, which is a key raw material for steel manufacturers.

“Coking coal, one of the key input raw materials that changes the dynamics of the steel industry, has plunged over the last few days with easing supply concerns,” said a Motilal Oswal Financial Services report. Further, Chinese steel manufacturers are cutting production due to environmental concerns and Chinese steel maker Baowu Group is also reselling its Glencore low-volume coal for $370 per tonne.

“The fact that the largest steel manufacturer in the world is reselling its coking coal in the open market, coking coal is expected to run in surplus and prices are expected to correct further in coming weeks,” the brokerage firm added.

Steelmakers in India that majorly rely on coking coal imports will get a huge relief as higher raw material prices of over $400 per tonne had severely dented their margins.

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Price hikes

“Near-term outlook seems to be positive with price hikes expected in the coming weeks,” said the Motilal Oswal analysts, adding, “Demand for long steel has remained firm on the back of government’s push to fast-track infrastructure projects and HRC (flat) has witnessed a price hike of Rs 1,000 per tonne week-on-week (WoW) to Rs 59,300 per tonne.”

ICICI Securities said traders are expecting a price hike in the range of Rs 1,000-1,500 per tonne for March 2023 owing to favourable import parity and much-improved export realisation.

Analysts believe that domestic steel demand in India is quite robust with the fourth quarter being the strongest quarter.

Foreign brokerage JP Morgan said Indian steel mills are well-positioned on the back of improving domestic demand, re-opening of export markets and higher domestic steel prices. The firm is ‘overweight’ on Tata Steel and Steel Authority of India and sees the lower institutional ownership as an additional positive for stock prices.

Iron ore stable

Coming to iron ore prices, although the metal also witnessed a price reduction in international markets, India is relatively self-sufficient and the prices have not changed much in the domestic market, said the Motilal Oswal report. “On the contrary, Odisha iron ore fines index, which witnessed a price hike of Rs 300 per tonne WoW and NMDC, with a strong correlation with the index, is expected to experience a similar price hike in the coming weeks,” it said.

The concerns

Antu Thomas, a research analyst at Geojit Financial, said the reopening of the Chinese market will be a positive for metal companies in the long term but the short to medium-term trajectory will depend on global growth.

“The margins of local businesses with international exposure shrank sharply in nine months of FY23,” he said. Global headwinds, such as high inflation, rising interest rates and recessionary conditions will continue to pose a threat to the financial performance of metal companies in the near term, he cautioned.