New year brings new hopes for metal stocks

Industrial metal prices were trading at multi-month lows. Sharp declines in the underlying commodity and metal stocks became a routine after April 2022.

Why you might ask?

Rising raw material prices, stringent margins, an economic slowdown in China, a levy of heavy export duty, etc.… all these headwinds came together and stopped the metal stocks rally.

In 2022, the BSE metal index underperformed the benchmark BSE Sensex. The index rose 1% while the Sensex was up 5%.

View Full Image

As things stand now, there are several tailwinds supporting the metal sector.

With the beginning of 2023, the metal index has seen a decent rise.

Leading metal stocks like Tata Steel, Hindalco, Vedanta, Coal India, have also seen a sharp rise in their share prices.

So, what has changed for metal stocks right now? Let’s find out…

Why are metal stocks going up?

#1 The domino effect

China is the biggest consumer as well as supplier of industrial metals around the globe. But the country’s borders were closed for nearly three years because of its strict zero Covid-19 policy.

Owing to this, the global demand for metals was dampened. A lockdown in China impacted metal stocks across the globe …just like one fall of a domino causes all other dominoes to fall.

But a few weeks ago, China dropped its zero Covid-19 policy.

The improper removal of the policy has currently pulled an Uno reverse on the country as China is flooded with Covid-19 infections.

This removal added to the economic uncertainty of the country. However, experts predict that the faster reopening shortens the duration of economic shocks. The quick policy shift is to pave the way to a fuller economic recovery.

Hence, losses may accumulate in the first few months but overall, the country will see a fast economic rebound. Bloomberg experts have also increased their estimated growth expectations for China.

This is what they had to say,

“We see increased upside risks to 2023 GDP: The quicker reopening could push full-year growth as high as 6.3%, well above our base case of 5.1%.”

This domino effect will also be felt on the metal sector. On the back of improving economic conditions in China, metal prices are expected to rise.

An unprecedented real estate slump has prompted Chinese authorities to step up support for the industry in the last month. A growing real estate sector indicates a growing metal sector, especially steel companies.

As more houses are built, more steel will be required. China being the largest importer of metals, will have to import steel from around the world, even from India. This would give a much-needed push to Indian steel companies.

An increase in metal prices will boost the profit margins of the companies.

Also, there are reports circulation that domestic steel producers might hike prices in January 2023 as the recent price hikes in global markets appear encouraging.

A strong Chinese economy means increased demand for steel and resultantly improving margins for metal companies. With that hopes, metal stocks are seeing a rise.

#2 Removal of export duty

The finance ministry in May 2022 imposed export duties ranging from 15% to 45% on inputs for iron and steel in a move to increase their availability for domestic manufacturers.

After six months of the levy, on 19 November 2022, the government restored the status quo as was prevailing before 22 May 2022 and withdrew the export duty on iron ore lumps.

The removal of export duty on steel products will help domestic metal producers pull up their profits by now having the freedom to explore overseas markets.

Performance of metal stocks

Here’s how metal stocks have performed in the past one week.

View Full Image

Investment Takeaway

Indian metal companies had a rough and volatile 2022. However, it appears the worst is over for these companies.

Metal companies might not see an immediate benefit of improving condition of Chinese economy and the removal of export duty. However, gradually the companies will feel the effect as global economic factors move in favor.

Domestic demand too looks set to rise with the Indian government making sure infrastructure remains the core theme for the next couple of years.

However, cyclicals are usually riskier, i.e. their fortunes are prone to economic booms and busts. They are also volatile as they tend to fluctuate a lot with the current scenario and conditions prevalent in the economy.

Choose the fundamentally strong companies if you wish to invest in the sector and don’t compromise on margin of safety.

How the above development pans out for metal stocks remains to be seen.

Happy Investing!

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such.

This article is syndicated from Equitymaster.com