Metal stocks shine in August analysts’ tracker report: China’s support boosts confidence

There appears to be anticipation that China’s measures and fall in coking coal costs will improve demand for steel, although there is no evidence yet at ground level.

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Three metal stocks – Hindalco Industries Ltd, JSW Steel Ltd, and Tata Steel Ltd saw the highest upgrades in Moneycontrol’s analysts tracker for August. The companies’ market performance was driven by the Chinese government’s support measures and better-than-expected growth in the domestic June quarter. The BSE Metal index has surged in nine out of its last 11 trading sessions, reaching a nearly 17-month high.

China’s central bank recently lowered the one-year loan prime rate to boost the economy and assist the struggling real estate sector. They also relaxed mortgage policies to stabilise the residential property market. These actions may benefit China’s real estate sector, and more stimulus measures are anticipated. Metal stocks have responded positively, anticipating increased demand in China, despite there being no clear signs of demand recovery on the ground, analysts said.

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“However, unlike in the past when the property sector came to rescue the economy, we believe this stimulus will have limited upside in the long run due to muted demand from first-time buyers, no increase in income, record youth unemployment and an ageing population,” Motilal Oswal said in its latest note.

Indian HRC steel prices rose due to stimulus measures in China in August. Domestic HRC prices increased by around Rs 1,000 per tonne compared to the previous month, averaging Rs 56,300 per tonne in August 2023, following price cuts in June and July 2023.

Domestic steel consumption remained strong, showing a year-on-year growth of 18 percent and a month-on-month growth of 7.4 percent in July 2023. Exports faced challenges due to weak global demand, while imports increased because Indian steel prices were trading at a premium of Rs 4,100 per tonne compared to China and Rs 3,500 per tonne compared to South Korea.

Improved margins

Analysts anticipate that steel companies will see slightly improved margins in the second quarter, driven by reduced coking coal costs (down by approximately $50 per tonne), although this improvement will be partially offset by lower realisations (down by around Rs 2,100 per tonne compared to the previous quarter).

“Margins for steel companies are expected to remain healthy in Q2, aided by lower coking coal consumption cost. Rate cuts in China and easing of mortgage policies are expected to aid the real estate sector in China. Metal names have reacted positively to anticipated demand uptick in China, even as demand greenshoots are yet to be seen on the ground”, said JM Financial in its latest note.

JM Financial predicts that strong performers like Hindalco, Novelis with its improved margin performance and robust balance sheet, are likely to outshine the broader market index. Additionally, Tata Steel, with its strong performance in the domestic Indian market and ongoing restructuring efforts in the UK, has the potential to join the list of outperformers.

Analysts further say that within the local market, demand remains strong, prompting steel mills to implement several price increases since August 2023. Steel prices, previously under pressure due to global price fluctuations and monsoon-related disruptions, appear to have reached their lowest point and are now showing a gradual upward trend.

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“The domestic demand outlook remains robust and the recent price hikes would support margins in 2H FY24 and offset the recent increase in coking coal prices. We believe demand for long steel will remain strong as several infra projects see a pickup in execution,” the Motilal Oswal Securities report said.