 "metals sector, lead, copper, aluminium, steel")
Stocks of base metal companies Hindalco, Vedanta and Hindustan Copper were up between 2.5 and 14.5 per cent on Monday, even as leading indices fell by over two per cent. With this, base metal stocks have seen gains of 50-198 per cent since November 2020 .
Amid a steady economic recovery and Covid-19 vaccination drive in full swing, global demand for base metals such as copper and aluminium has outstripped the supply, pushing spot prices of these metals higher than futures. Besides, expectation of higher inflation and veering of government policies towards electric vehicles (EVs), too, seem to be drawing investors towards base metals stocks.
“Expectations of a historic deficit of raw material amid rising demand, signal of tightness on London Metal Exchange (LME), hopes of the US and Europe stimulus, revival of global inflation, and clean-energy transition have changed sentiment over the past one and a half month,” says N S Ramaswamy, head of commodities at Ventura Securities.
Sugandha Sachdeva, VP-metals, energy and currency research at Religare Broking, meanwhile attributes the optimism in the sector to swift economic recovery from the pandemic, roll-out of vaccines and huge liquidity.
At the bourses, most of the base metal stocks have also outperformed the benchmark Nifty50 index and the Nifty Metal index so far in the calendar year 2021.
Stocks such as Vedanta, Hindustan Copper, Hindalco Industries, and Hindustan Zinc have gained in the range of 4 per cent to 41 per cent, ACE Equity data show. In comparison, the frontline 50-share index is up 7 per cent till Friday while the Nifty Metal index is up 9 per cent.
The outperformance continued on Monday as well, when the Nifty Metal index surged 1.6 per cent on the NSE, as against a 2 per cent decline in the Nifty50 index.
China drives the sentiment
Analysts expect global demand of aluminium to increase by 2 per cent to 63.62 million tonnes (MT) in 2021 with bulk of it coming from China on rising orders from downstream sectors, such as infrastructure, real estate and automotives.
On the supply side, global aluminium production is expected to rise by 2.51 per cent to 66.9 MT, most of which is expected to come from China, said analysts at Nirmal Bang in a recent report.
As regards copper, Christopher LaFemina, senior global metals and mining analyst at Jefferies, believes the metal is witnessing a “structural deficit” as total copper inventories at the three major metal exchanges (LME, COMEX and Shanghai Futures Exchange) have declined by 67 per cent from 638,375 tonnes in March 2020 to 211,141 tonnes as of last week.
“The supply of the red metal has been shrinking, raising expectations of a historic deficit this year, fuelling prices on the higher trajectory. Besides, supply constraints are supporting this up-move in zinc prices too,” says Sachdeva of Religare Broking.
Zinc production had declined by 5.3 per cent (Y-o-Y) to 1.33 MT in 2020, while China's refined zinc output is expected to decrease by 64,000 MT to 547,200 MT in February, data show.
Outlook
On the LME, since start of November 2020, spot prices of aluminium is up 14.5 per cent, copper by 33.4 per cent, nickel by 29 per cent, tin by 62 per cent while zinc is up 14 per cent.
“Base metal prices are expected to remain high as post crisis demand will outstrip near term supply. Outlook is positive for base metals and we might see some technical pullback looking at the overheated market,” says Bhavik Patel, senior technical analyst (commodities) at Tradebulls Securities.
Copper prices could march towards Rs 745-760 per kg at the domestic bourses, while zinc may test Rs 255-270 per kg over the medium-term. For Indian copper producers, since their margins are largely fixed, the gains are likely to accrue when contracts come up for renewal at higher rates amidst an improved business environment.
Nickel, on the other hand, looks poised to chart its course towards Rs 1,540 per kg mark, say analysts at Religare Broking.
