Sustained improvement in demand: A key factor for upsides in metal stocks

Signs of green shoots in China’s trade data has led analysts tracking industrial metals to be cautiously optimistic about demand recovery. Refined copper imports rose 2 per cent year-on-year (Y-o-Y) to the highest levels since December 2021, China’s trade data for November 2023 showed. Steel and iron ore inventories are low and aluminium exports were up on a Y-o-Y-basis for the first time in calendar year 2023 (CY23). As the inventory for heating purposes piled up, China’s coal imports surged 35 per cent Y-o-Y.

Higher Chinese steel exports could temporarily lower global steel prices. But it may also be a signal that the worst is over in terms of tepid demand. Steel exports rose 43 per cent Y-o-Y and iron ore imports rose 4 per cent Y-o-Y in the hope of stimulus measures showing results. Any growth acceleration in China will likely result in a surge in global metal prices. Global coal prices would also firm up, which would be good for Coal India Limited’s (CIL’s) e-auction premiums.

Domestic steel prices inched up a little in the first week of December while that of aluminium, nickel, and copper remained subdued. Indian steel imports hit a 7-year high at 7 million tonnes (up 42 per cent Y-o-Y). Given firmer ore and coal prices, steel makers may have to hike their prices.

The outlook seems less grim but there is still a question mark around sustainable improvement in demand. Apart from metals producers and CIL, some analysts are pointing at the steel and pipe industry with ‘buy’ recommendations for JTL Industries and Apollo Tubes.

In the steel sector, Steel Authority of India Limited (SAIL) had a strong second quarter of financial year 2023-24 (Q2FY24) numbers, with revenue growth of 13 per cent on the back of volume expansion. Ebitda jumped, more than doubling on sequential basis and up 4 times Y-o-Y. The concerns are debt overhang as SAIL is expanding its capacity in phases to 35 million tonnes (mt) by FY32 from the 20.6 mt currently. This could keep debt elevated.

For Tata Steel the main concern centres around the UK, where it has to complete a major restructuring. The free cash flow will be under par until that is done.

Hindalco’s consolidated revenue was down 4 per cent Y-o-Y, (up 2 per cent quarter-on-quarter, or Q-o-Q). But operating profit was up, both sequentially and Y-o-Y. Novelis is doing well and the company has big capex plans focussed on downstream value-added products, which should boost margins.

Apollo Tubes targets ambitious revenue and operating profit growth of over 100 per cent between FY23 and FY26. It has capex plans to double capacity though FY24 sales volume guidance is now at the lower end of guidance range of 2.8-3 mt. The target is capacity of 10 mt by FY30 with capex for the first 5-million tonnes per annum (mtpa) expansion phase mostly done. Blended operating profit per tonne should improve, as the expansion at the Raipur plant kicks in during H2FY24. The company’s revenue grew 17 per cent Y-o-Y and operating profit grew 40 per cent in Q2FY24. 

JTL Industries, which is in the structural tubes market, hopes to grow from 1.3 mt in CY23 to 2.2 mt by CY30 due to policy thrust on developing infrastructure, which has created demand for structural steel. JTL has a strong balance sheet with zero debt, and hopes to carry out expansion through internal accruals. While the capex may impact return on capital employed, margins will remain reasonable through this process.