The Nifty Metals Index has been on a remarkable trajectory since the start of February, up 62% so far. Even the second wave of the coronavirus pandemic failed to quell the rally in the metals index. The rise was helped by an improving commodity cycle, soaring steel prices and robust demand. Domestic brokerage houses, foreign brokerage houses and even Big Bull Rakesh Jhunjhunwala have repeatedly expressed bullish views on the metal’s shares. In addition, the recent tax change in China is expected to support the upward trend.
Commodity cycle, Chinese emissions reforms help metals
Metals inventories have benefited from strong demand from various sectors and supported by the government’s infra pipeline. Deleveraging and Capex contributed to the momentum. In addition, China’s push towards carbon neutrality is expected to lead to higher global prices. “Our China Materials team believes this will cause the cost curve to trend upward and supply disruption to energy-intensive, high-emission industries such as steel and aluminum,” which will increase the potential for higher prices for these commodities, ”Morgan Stanley said in a note earlier in March.
In an effort to become carbon neutral and reduce emissions, China has now removed a rebate on the value added tax (VAT) levied on exports of several steel products, making exports less attractive, according to CLSA. The brokerage company pointed out that in China, import duties on pig iron, crude steel, recycled steel raw materials, ferrochrome and others have been reduced to zero. At the same time, export duties were increased to 25% for ferrosilicon, 20% for ferrochrome and 15% for high purity pig iron. “With the recovery in global steel production due to increased demand outside of China and a shift in production from China, iron ore prices may remain strong,” CLSA said.
More room for price increases
Domestic steel prices have increased recently but still remain below imports. “The national steel mills increased HRC / CRC prices from Rs 4,000 / 4,500 per ton in May to Rs 67,000 / 80,000,” Motilal Oswal said. Domestic steel prices are negotiating at a discount of Rs 8,000 / t compared to the landed cost of imports, leaving room for further increases, they added. CLSA said Indian steel mills may soon increase prices by Rs 2,000-4,000 / tonne, with another hike likely in mid-May or early June.
Choice of actions
CLSA said TATA Steel remains its number one choice in the industry. Since the Union budget, shares of Tata Steel have jumped 79% to now trade at Rs 1,075 per share. in the short term, ”they said.
Meanwhile, Motilal Oswal has SAIL on his radar. The SAIL share price has skyrocketed 132% from the Union budget. “SAIL is our favorite game given its higher price sensitivity, due to greater operational and financial leverage, as well as attractive valuations,” Motilal Oswal said in a recent report.