Metal index gains over 1% as China eases Covid-19 rules; Hindalco up 4%

The reopening of the Chinese economy could brighten the outlook for global growth and commodity demand

Shares of metal companies were in focus on Monday with the Nifty Metal and the S&P BSE Metal index moving up more than 1 per cent on the bourses, in an otherwise subdued market, as reopening of the Chinese economy brightened the outlook of global growth and commodity demand.

At 01:20 PM, the Nifty Metal and the S&P BSE Metal index were up 1.04 per cent and 1.9 per cent, respectively. In comparison, Nifty 50 and the S&P BSE Sensex were down 0.14 per cent and 0.15 per cent, respectively.

Individually, Hindalco Industries, National Aluminium Company (Nalco), Hindustan Copper, Tata Steel, and Hindustan Zinc surged in the range of 2 per cent to 4 per cent. While Steel Authority of India (SAIL), Jindal Steel, JSW Steel, Jindal Steel and Power, and Vedanta gained between 1 per cent and 1.9 per cent.

According to Motilal Oswal Financial Services, the latest easing in quarantine requirements in China is certainly a step in the right direction for metals. However, more needs to be done if this enthusiasm has to be sustained.

The brokerage firm also attributed the ongoing momentum in the metal space to the Chinese's government'srecently implemented 16 property measures to help the weak property sector.Some of these measures include debt extensions to the industry and relaxing deposit requirements for homebuyers. These could potentially boost the usage of industrial metals, including copper.

"Around 23 per cent of China's copper enduse comes from civil and building construction. Chinese regulators, meanwhile, made it easier for property developers to raise money, a boost for a metals-intensive sector struggling with a debt crisis," the brokerage firm said.

Although recent mine and smelter expansions have seen minimal disruptions, factors such as resource nationalism and stricter environmental oversight are likely to persist in the long term, raising concerns that new mine projects and planned smelter expansions will be insufficient to meet future demand. Demand for copper and industrial metals could stay fairly limp over the next few months as global interest rates peak and China’s economy likely stays weighed down by the property crash and Covid-19. Historically low global inventories of copper could boost prices in the near term, MOFSL said in a report on base metals.

Meanwhile, while announcing the September quarter (Q2) earnings, most of the companies in the ferrous metals space highlighted increase in input costs, which impacted profitability adversely and reduced ASP due to imposition of export duty. The domestic steel demand continues to remain strong and steel companies under our coverage expect ASP to likely bottom out this quarter, MOFSL said.

Further, reduction in coking coal cost and working capital release should expand margins. Frequent lockdowns in China and high energy cost in Europe have caused demand-supply mismatch in non-ferrous space, the brokerage firm said.

Separately, in a bid to provide a fillip to the domestic steel industry and boost exports, the government, last month, withdrew the 15 per cent export duty on steel products (which was earlier levied during May 2022). Steel products now attract nil export duty compared to 15 per cent earlier. The removal of export duty is a significant relief and a long term positive for the domestic steel sector, according to analysts at ICICI Securities.