Metal stocks could correct soon but remain a medium-term buying opportunity

All the base metal stocks could see deeper corrections, but a strong global economy may make this a medium-term buying opportunity

The boom in industrial metals has run into a roadblock that is hard to assess. As activity resumes across the globe, the demand for steel, copper, zinc, aluminium, tin, etc., has shot up. Since supply chains have also been disrupted, this led to a big rise in prices.

This week, the world’s largest consumer, China, announced it would pull prices down by releasing some of its reserves of copper, aluminium and zinc, etc. It had already imposed price controls on iron ore. In the last year, copper has more than doubled to record highs, and aluminium and zinc at 10-year-highs. Iron ore and steel were also at record highs.

What happens to non-ferrous metals as a result? The PRC (People’s Republic of China) is estimated by Citigroup to hold 2 million tonnes of copper, 800,000 tonnes of aluminium, and 350,000 tonnes of zinc. This is about two months' worth of China's refined copper consumption, but only 2 per cent of its aluminium usage and 5.2 per cent of its annual zinc consumption.

China says it will release some of these holdings in public auctions but there are no details. Just as a reaction to the announcement, copper futures on the London Metal Exchange fell 7.6 per cent, which is the biggest fall since global lockdowns in March 2020. Copper also dropped 2.5 per cent on Shanghai Futures Exchange. Aluminium, zinc and nickel have also fallen.

At the same time, the USD has strengthened on the latest Fed Monetary Policy update, so international prices could fall more. China may not sell a very high proportion of aluminium and zinc consumption.

But any surplus over anticipated demand – even a 2 per cent surplus – can cause a sharp drop in prices. This is especially true since some shortages are seen to be temporary with supply expected to rise as supply chains return to normalcy. Hence, China selling even one week’s worth (2 per cent of annual consumption) could result in a drop.

However, the other side of the equation is that the global economy has also surprised by the fast pace of recovery. Demand could be higher than estimated. In that case, after a temporary cooling off, prices will rise again. When market analysts review April-June 2021, and make estimates of demand for the next quarter, the quantum of China’s sales and the timing will be critical.

Hindalco has seen 150 per cent rise in share price over the past 12 months and a 7.5 per cent fall in the past week. Vedanta has seen 139 per cent rise in 12 months and 8.5 per cent drop in the last week. Hindustan Zinc has seen 84 per cent rise YoY and fallen 4 per cent WoW (week-on-week). Hind Copper has 363 per cent rise YoY and 15 per cent decline WoW. All of them could see deeper corrections but a strong global economy may make this a medium-term buying opportunity.