Metal stocks see relief rally

Short-term gains factored in; doubts over further gains

Of late, metal stocks have seen some bounceback on the bourses. Base-metal firms Hindalco and Vedanta are up 8.8 per cent and 22 per cent, respectively, from their lows seen on February 12. In steel, Tata Steel is also up from its recent lows, while JSW Steel hit a 52-week high on Tuesday. While these gains come on the back of significant share price corrections since June 2014, there are doubts over further gains.

The steel sector has been in the limelight for positive news flow in the past month. While China announced a 13 per cent capacity cut over 2020, the Indian government imposed minimum import price on steel imports to support the domestic sector.

There was relative appreciation seen in yuan, too. Data also indicated China’s finished steel exports for December 2015-January 2016 remained flat versus successive increases. The European Union has also imposed an anti-dumping duty on cold-roll steel from China and Russia. All this bodes well for domestic steel prices.

 

Stock prices now factor in most positives. Going ahead, it is the sustained uptick in realisations and growth in demand that will hold the key to profitability of domestic firms.

Analysts at JM Financial say the positive rub-off on prices has been factored in. Analysts at Religare say any rally in steel stocks would hinge upon a sharp demand recovery or extension of the minimum import price beyond a year.

For now, there aren’t any signs of a meaningful pickup in demand. In the past month, base-metal prices have seen some rebound. Per-tonne aluminium prices on the London Metal Exchange are almost $100 higher at $1,570.

Again, there are questions on its sustainability, say analysts, especially given concerns around China and demand across the world. If prices rise further, analysts believe that after completion of expansions, Hindalco is well placed to benefit.

But, they are not convinced on significant upsides yet. Analysts at JM Financial say despite poor world (excluding China) aluminium prices, China’s large surplus and yuan depreciation can keep Chinese exports high for some more time. While the downside might be limited for base metals and stocks, significant upsides are unlikely.