Metal stocks have been underperforming since the beginning of 2023 due to concerns over an economic recession in developed economies and weak earnings in the December quarter. In the first two months of the current year, the Nifty Metal index has dropped by around 3.80% and 18.55%, respectively.
However, the Nifty Metal index began the month of March on a strong note, surging by nearly 4%. This rally was triggered by the expansion of manufacturing activity in China, the world's largest producer of metals, which grew at the fastest pace in more than a decade in February.
The reopening of China's economy after almost three years of Covid-related restrictions has been the flavor of the season for metals since November 2022. However, China’s modest economic growth outlook of 5% has turned out to be a dampener, said brokerage firm Motilal Oswal in its recent report.
The National People's Congress (NPC) aims to only support and stabilise the Chinese economy by boosting domestic consumption, and the absence of any thrust towards real estate and infrastructure might dampen the metal sector's rally further, said the brokerage.
The modest government bond sale, which is the backbone of infrastructure investment in China, indicates that the demand for infrastructure-led commodities, such as iron ore, coal, cement, and base metals, may ease in CY23.
On the other hand, coking coal, one of the key input raw materials that change the dynamics of the steel industry, has plunged over the last two weeks with easing supply concerns. The brokerage noted that the premium hard coking coal (HCC) prices hit a low of $364/tonne last week, down from a high of $402/tonne in mid-February 2023.
However, the brokerage also notes that strong demand in Asia and Europe has led to a sudden surge in HCC prices. The volatile nature of coking coal prices is a cause of concern for Indian steel makers, who heavily rely on imported coking coal.
Typically, steel manufacturers in India maintain an inventory of about two months, which means that any price hike would adversely affect their profit margins in 1QFY24, it added.
According to the brokerage, the domestic demand for steel in India is robust, and steel mills are not facing any constraints. The 4Q of the current fiscal year is the strongest quarter for steel demand.
The brokerage also stated that major steel producers have increased flat steel prices by ₹1,400/tonne to ₹60,700/tonne to pass on the rise in raw material prices to end consumers. A similar trend has been observed in the international market as well.
In India, the demand for steel will be driven by projects in transportation, railways, power, and infrastructure that are either at an advanced stage or are nearing completion stage.
Moreover, the higher exports to Europe in the last few months have caused supply tightness in domestic markets, thereby driving up the prices. A few mills in India have a robust export book as of March 2023 end.
"The latest data shows that Coal India has achieved record production and dispatches, with the company producing 619.7 mt of coal and dispatching 630.5 mt between April 2022 and February 2023, which is up by 14.3% and 5.1% YoY, respectively," said the brokerage.
Coal India has achieved 88% to 90% of its yearly target, which is a strong indication of the company's operational efficiency and growth prospects.
In addition, NMDC reported a production growth of 4% YoY to 4.48 mt in February 2023. The finished steel production during April 2022 to February 2023 also saw an increase of 5.7% YoY to reach 108.1 mt while consumption improved by 9.8% to 105.7 mt.
The brokerage expects steel imports to fall in the coming months as international prices are now at parity with domestic prices.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie.
