The Nifty Metal index has now slipped for two consecutive weeks, falling 8% since May 10. The fall in the index comes after a massive 79% rally since the end of January this year. Major stocks such as Tata Steel, JSW Steel, JSPL, Hindalco, and SAIL have all surged sharply in the last few months as metal prices rose amid the larger commodity bull run. SAIL, Tata Steel, and JSW Steel are some of the stocks that have more than doubled in price since the end of January. Although some might argue that the long-term picture still looks attractive for some steel companies, investors are eager to know if the current rally in metals is over.
Chinese intervention hits metals
Metal prices have soared in recent months helped by China’s policy changes and crack-down on pollution. However, the recent fall has also been nudged by China. “China’s cabinet announced last week that it would strengthen its control of commodity supply and demand to prevent ‘unreasonable’ price increases from being passed on to consumers,” Kshitij Purohit, Lead Commodities & Currency at CapitalVia told Financial Express Online. Chinese regulators have picked up the task to control prices, even meeting leading companies. “A statement from the world’s biggest metal user has triggered the investors to book the partial bookings in the metal stocks,” Kshitij Purohit said.
Outlook less optimistic
After having remained bullish on commodities and metals, analysts at brokerage and research firm JM Financial have also changed their views. “The prospects of a weaker dollar still appears to be supportive for metals, but our latest analysis of long term business cycle indicators for OECD countries and pricing power of manufacturing sector in developed economies (US) suggest a significant divergence and disconnect,” they said in a recent note. Further, they added that prices in China are correcting in response to slowing construction activities amid rising construction costs. “We are changing our views; Less optimistic on metals stocks,” JM Financial said.
The note further said that the outlook is not clear when it comes to metal stocks. “We believe that market indicators have run far ahead given the context of the underlying strength of the economic recovery that is still nascent and significant supply-side factors including production cuts by China in case of steel, by OPEC in case of crude oil production, and bottlenecks across various input items,” they said.
Deleveraged companies remain attractive?
Even though the metals space is seeing some turbulence, Kshitij Purohit sees some silver lining. The skyrocketing of steel prices has led companies to deleverage their balance sheets. “Tata Steel and SAIL are likely to benefit the most from the deleveraging period in the steel industry,” he said. “Tata Steel’s net debt to EBITDA is expected to drop from over 6 times in financial year 2020 to 1.23 times in next fiscal year, while SAIL’s net debt to EBITDA is expected to drop from over 11 times in FY20 to 0.7 times in FY23,” Purohit added.
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