Commodity outlook:More Chinese stimulus required for steel demand, prices to rise, say experts;Tata Steel, SAIL in focus

Commodity outlook: Indian metal stocks have gained attention following China's announcement of a series of stimulus measures on September 27, 2024. Nevertheless, the market anticipates additional stimulus to be revealed for a clearer outlook on the sector in the short term. China's stimulus actions involve reducing borrowing costs, lowering reserve requirements, and offering direct fiscal aid to lower-income populations.

When the question of whether Chinese stimulus can drive demand for ferrous and non-ferrous metals comes up, analysts have noted that the Chinese stimulus has bolstered steel prices. Before the announcement of the stimulus, domestic spot prices for hot-rolled coils (HRC) in India were trading at a premium of 7-8% compared to Chinese prices, which pressured Indian steel manufacturers.

"Chinese stimulus has supported steel prices. China's announcement for series of stimulus measures on 27th September 2024 has led to an increase in China HRC prices which supported all the regional steel prices. Domestic HRC prices are now trading at ~1% discount to Chinese Imported prices.

Prior to the stimulus announcement the spot domestic HRC prices were trading at 7-8% premium to Chinese prices, putting pressure on Indian steel mills. However, much more stimulus is needed in order for demand to pick up and for steel prices to increase from the current levels," said Aditya Welekar, Senior Research Analyst- Metals, Axis Securities.

Also, Ventura Securities, noted that HRC prices fell by 17% to ₹4,8030/ton in September due to ongoing imports from China and Vietnam. Year-over-year, coking coal prices have decreased by 38% to $200/ton, attributed to sluggish global steel demand. This drop in coking coal prices indicates a decrease in demand for raw materials worldwide. As a result, the reduction in steel prices may pressure profit margins and keep them under strain. The government is contemplating increasing the import duty from 7.5% to 15% to align import prices more closely with domestic costs.

Welekar also pointed out that China's real estate market continues to face challenges, and Chinese steel exports for the period of January to September 2024 have reached a multi-year peak of 80.8 million tons, marking a 20% increase compared to the previous year. China’s PBOC reduced the RRR (reserve requirement ratios) by 50 bps in Sep'24, and depending on the market liquidity situation later this year, the RRR may be further lowered by 0.25-0.5 percentage points.

Chinese stimulus and its impact on Indian metal companies?

Aditya explained that domestic Chinese metals demand is under pressure as the major metal intensive construction sector is still reeling under pressure. If China announces more stimulus and also cuts down its steel and nonferrous metals production, then the steel and non ferrous metals will find support. Non ferrous prices are structurally well placed currently vis-s-vis steel as they find applications in growing sectors such as renewable energy and EVs which provide structural tailwinds. Non ferrous metals also have tailwinds from the federal reserve rate cut cycle and softer USD index.

Nifty Metal Index

In October to date, the Nifty Metal index has declined by 8% due to weak earnings and a generally lackluster market. The metal index has experienced a correction this month in tandem with the broader market trends. Ruchit Jain, Lead Research Analyst at 5paisa, highlighted that the index is now trading around its 200 SMA support of 9,000. Hence, investors could either see a pullback or a sideways move in the near term. It is advisable to trade with a stock-specific approach in this sector.

Recently, JSW Steel Ltd announced an 85% drop in consolidated net profit, totalling ₹404 crore for the quarter that concluded on September 30, 2024, as increased imports of inexpensive finished steel caused domestic prices to hit their lowest levels in three years.

Which are top metal stocks to watch?

According to NS Ramaswamy Head CRM & Commodities of Ventura Securities, all the commodities’ related stocks are price sensitive and allergic to smallest of triggers in the market, hence one needs to be cautious while picking stocks at the appropriate valuation and merit of the stock.

Prices of the leading equity stocks, worth a watch are Tata Steel, JSW Steel, Jindal Steel & Power Ltd (JSPL), Steel Authority of India Ltd (SAIL), Hindalco, Vedanta, Coal India, NMDC, NALCO and Maan Aluminium. US Federal decisions on 7th November 24 FOMC decisions on rate cuts would give further direction.

Disclaimer: The views and recommendations above are those of individual analysts, experts and broking companies, not of Mint. We advise investors to check with certified experts before making any investment decisions.