Metal index down 10% in 2023 YTD; will the trend continue? Here's what experts say

While the benchmark and many sectoral indices hit record highs in the recent past, the metal space remains one of the worst performers of 2023. The Nifty Metal index is still down over 10 percent this year so far. In comparison, the Nifty has gained 3 percent in 2023 YTD.

The weak growth outlook, poor earnings, multiple downgrades, softness in steel prices and margins under pressure have led to the ongoing correction in the metal space.

However, in the last 1 year, the metal index has been one of the better performers, giving strong returns. The Nifty Metal advanced over 31 percent in the last 1 year versus a 19 percent rise in Nifty.

The index witnessed a sharp correction in the first 2 months of the current calendar year, however, it has been on a slow recovery mode since March. Nifty Metal shed almost 4 percent and 18.5 percent in Jan and Feb, respectively. Meanwhile, it has gained 4.3 percent, 5.5 percent, 1.5 percent and 2.7 percent in March, April, May and June (so far), respectively.

Meanwhile, in the last 3 years, the metal index has given exceptional returns, rallying 196 percent versus an 80 percent jump in Nifty.

Constituents

Of the 15 stocks in the Nifty Metal index, 9 have given negative returns in 2023 YTD while the remaining 6 were in the green. Adani Enterprises cracked the most, down over 40 percent, followed by NMDC, Hindalco and Vedanta, which fell 15, 13, and 9 percent, respectively. JSPL, Tata Steel, JSW Steel, and Hind Zinc were also in the red, down between 2 and 5 percent.

However, APL Apollo defied the weak trend in metal space to surge over 20 percent in 2023 YTD. It was followed by Ratnamani Metals and Welspun Corp, up 19 percent and 10 percent, respectively.

Meanwhile, if we look at the one-year trend, no Nifty Metal constituent was in the red. All gave positive returns. JSPL rallied the most, over 75 percent followed by APL Apollo, up 53 percent. Meanwhile, Ratnamani Metals, NMDC, Hind Copper, JSW Steel, Tata Steel, Hindalco, Hind Zinc, Vedanta, Coal India and SAIL also jumped over 20 percent each.

Outlook

Let's see where experts see the index headed.

Vinit Bolinjkar, Head of Research, Ventura Securities

Rising demand for affordable housing, infrastructure development, construction/real estate projects and improving manufacturing activities, has increased the domestic steel demand. In line with the rising steel demand, the government is targeting 300 mn tons of annual steel production by FY30 (from 126 mn tons produced in FY23). We believe that this rally in the steel sector is likely to continue over the next 8-10 years and our top picks are – JSPL, Lloyds Metal & Energy and NMDC.

Sanjay Moorjani, Research Analyst, SAMCO Securities

While the Nifty and Sensex are near their all-time highs, the Nifty Metal index has been underperforming and is down 10 percent Year-to-Date (YTD). This underperformance could be attributed to the recessionary fears in the US and low demand from China which remains a major consumer in the global metal market. However, the Chinese reopening has led to a resurgence in the demand for the metals. In fact, last week China’s central bank decided to cut the short and medium-term lending rates. The decision comes as a major boost for the metal sector since it will lead to an increase in the infrastructure and real estate sector in China which has been lagging growth for a prolonged period now. NMDC, SAIL, and JSPL are some of the stocks which look promising from this space.

Aditya Welekar, Senior Research Analyst, Metals & Auto, Axis Securities

We maintain our cautious view of the steel sector as China's steel-intensive property sector remains under pressure. Recent macroeconomic data from China could be more encouraging. Steel demand lead indicators such as new property stats remain weak, pointing towards a weak demand outlook.

The market is expecting stimulus from China to boost the economy. We expect some bounceback in steel prices if China announces additional stimulus measures, but a sustained demand recovery should be monitored. For the Indian steel mills, despite the pressure on steel prices, the fall in the raw material (coking coal) prices have held up the spreads.

We have a BUY rating on SAIL and NALCO in the metal sector.

Suman Bannerjee, CIO, Hedonova, a US based hedge fund

Looking ahead, the steel sector has a promising future despite its current struggles. I feel the demand for steel is fueled by sectors like construction, infrastructure, automotive, and manufacturing, which are expected to experience steady growth in the years to come. This means that the need for steel will remain strong. Factors like urbanization, population growth, and industrial development in emerging economies contribute to the long-term demand for steel. While I generally approach investing in metal stocks with caution, there are two companies that stand out as potential top picks in the current market landscape: JSW Steel and Shyam Metalics and Energy.

Abhijeet Bora, Deputy VP, Analyst, Sharekhan by BNP Paribas

We believe that the earnings downgrade cycle is largely over for steel companies but the recent softness in international steel prices is a near-term concern on sustained margin recovery for steelmakers although would see some respite from a decline in coking coal price.

Nirav Karkera, Head of Research at Fisdom.

Despite ongoing near-term challenges, including the possibility of a recession in Europe, the slowdown in China, and fluctuations in raw material prices, our outlook on the Indian metal industry remains neutral in the short term and bullish in the long run.

Although the industry has experienced minor fluctuations, we maintain a positive view of its prospects and believe in its strong growth potential. While demand may have been temporarily impacted by factors such as inventory pressure and the effects of March, there is no significant cause for concern. India's growth trajectory indicates the potential for increased demand, with expectations for this positive trend to continue into the following calendar year.

Considering recent market corrections, a cautious and staggered entry into the sector may be prudent. This approach allows investors to capitalise on potential opportunities while navigating the current challenges.

In addition, one key aspect to watch out for is the possibility of a stimulus package by China, especially if its domestic market share shows signs of weakness. Such a stimulus package could significantly impact the global metal industry, including the Indian market. Monitoring developments in China and their potential effects on the industry will be crucial in assessing future opportunities and risks.

Technical

From a technical standpoint, the Nifty Metal Index has exhibited a triangle pattern formation between the range of 1000 and 1200 points since April 2022, as observed on the weekly time frame. Recently, there has been a significant breakout of a horizontal trend line within this triangle pattern.

The breakout on the weekly chart holds considerable importance as it has been instrumental in sustaining the upward trajectory of the Metal Index. Currently, the index faces resistance at the 6,800 level, corresponding to the upper boundary of the triangle pattern.

Nevertheless, it is essential to exercise caution, as a potential breach below the 5,900 level could indicate a retest of the lower boundary of the triangle pattern, situated at 5,600 levels.

Our picks within the sector will be JSPL & APL Apollo Tubes

Pravesh Gour, Senior Technical Analyst, Swastika Investmart

The Nifty Metal index has delivered negative returns from Jan 2023 to till date. Presently it is facing resistance at the 6250-6300 zone while on the downside, 6000 is the important support during any correction which will lie on 200-DMA. It is still in a sideways trend where 6000-6500 is a well-defined trading band. It has to come out of this band to gain any momentum.

JSW Steel is our top pick from the metal space.