Nifty Metal jumps 58% since Budget driven by global macro indicators, demand

The index has surged 49% so far this year, rising 22% in April alone. In contrast, the benchmark index Nifty climbed 7% since the budget, adding 5% in 2021 so far.

Deep production cuts and the possibility of a reduction in steel exports in China are propping up sentiment and prices of metals, analysts said.

“The rise in the metal index is mainly driven by industrial metal prices reaching multi-year highs globally because of the weakening US dollar, sliding inventories, and decent demand from major economies such as China. There is also concern about mining activities because of the covid lockdowns and employee safety concerns,” said Sunilkumar Katke, head, commodities and currencies, Axis Securities.

Industrial metals like copper have touched a 10-year high globally and is on course to an all-time high of $10,190 per tonne hit in 201. Demand is outpacing supply because of faster-than-expected economic recovery with improving manufacturing data and improved demand forecast of the electric vehicle segment where copper is one of the main raw materials, Katke said.

Prices of other key metals such as aluminium and zinc have increased 20% and 14% respectively on the London Metal Exchange, since the Budget presentation in India. Over the last one quarter, regional hot rolled coil (HRC) prices have increased 16-18% to $830-840 per tonne, topping $800 per tonne for the first time in 13 years.

“Both ferrous and non-ferrous metals have seen a sharp rally in prices as global demand continues to improve amid a tight supply situation. Global steel prices have increased 25% over the last three months and are at all-time high. With mass vaccinations in the western world, demand outlook remains strong. This should support elevated prices,” said Amit Murarka, metal analyst, Motilal Oswal Financial Services.

Metal stocks have rallied driven by rising metal prices, resulting in strong earnings growth and faster deleveraging, according to Murarka. Domestic steel prices are, however, still at a 15% discount to imported steel prices, which leaves room for further increase in prices and should act as a cushion to any decline in global steel prices, he said.

Metal companies are expected to achieve record high profitability in the March quarter, with the earnings outlook for the first quarter of FY22 being stronger.

“Supported by strong cashflows and lower capex spending, companies are deleveraging at a faster pace. Steel Authority of India Ltd (SAIL) has reduced its debt by ₹15,000 crore in FY21 (30% of debt). We expect the deleveraging trend to continue in FY22 as well. This should push equity value higher,” Murarka said.

Since the budget, stocks in the Nifty Metal index such as Adani Enterprises, JSW Steel, SAIL, and Jindal Steel and Power have gained 69-129%. Tata Steel (72%), Hindalco (61%), and Vedanta were other top gainers during this period.

Analysts at Edelweiss Securities anticipate that the next three months will be beneficial for metal companies as prices and demand are likely to support.

“Steel supply scarcity, constrained iron ore supply and China continue to hold water and support prices. In fact, favourable macros, such as global reflation, a weak dollar index, and demand uptick, imply good times will persist a little longer,” Edelweiss Securities said in a note.