Nifty Metal was best-performing index in April with 11% surge. Will the rally continue?

Metals stocks have been thriving recently, supported by favorable economic data and global market trends. Strong PMI data from China and robust economic fundamentals in the US have propelled commodity prices upward, especially for base metals such as copper and aluminum. Supply constraints in these metals, combined with the London Metal Exchange's ban on Russian-origin metals, have contributed to the rise in prices. As the Federal Reserve considers potential interest rate cuts and China is expected to introduce new stimulus measures, the forecast for metals remains optimistic.

The Nifty Metal index was the best-performing sector in the month of April, rallying over 11 percent against a 1.2 percent rise in the benchmark Nifty. In the month of May as well, even though in the red, the index has outperformed the benchmark. In the current month, the metal index has shed 0.95 percent versus a 1.2 percent fall in Nifty.

Read here: Over 25 Nifty 500 stocks gained between 20-58% in April. Details here

Despite some correction in the current month, the index hit a new high of 9,401.55 on May 3, 2024. It has now jumped over 69.5 percent from its 52-week low of ₹5,544.95, hit on May 19, 2023. On the back of overall positive market sentiment, the Nifty also hit its record high of 22,794.70 on the same day.

Overall in 2024 YTD, the metal index has rallied 14 percent while the Nifty has advanced 2.78 percent. Meanwhile, in the last 1 year, the Nifty Metal index has soared over 56.5 percent as against a 23.5 percent gain in Nifty.

Read here: General Elections 2024: Will Nifty extend gains for 4th straight month in May?

Constituents

In the month of April, 14 of the 15 Nifty Metal constituents have given positive returns. Adani Enterprises was the only stock in the red, down 4.45 percent.

Hindustan Zinc and Vedanta were the top performers, skyrocketing over 46 percent each in the previous month, followed by Hindustan Copper, rallying almost 39 percent, and NMDC, which rose over 26 percent.

Meanwhile, SAIL increased over 20 percent, NALCO as well jumped over 20 percent, Hindalco gained 15 percent, Ratnamani Metals Tubes advanced 13 percent, Jindal Steel and Welspun Corp rose 9.5 percent each, JSW Steel and Tata Steel gained around 6 percent each, APL Apollo Tubes added 4 percent and Jindal Stainless was up almost 2 percent.

Read here: Nifty 50 surges 1.2% in April led by banks and auto stocks, IT sector lags

Will the rally in the metal space continue? Here's what experts say:

Aditya Welekar, Senior Research Analyst, Axis Securities, remains bullish on the metal space going ahead.

Good PMI prints in China and robust economic fundamentals in the US have led to increased commodity prices. While the demand remains resilient, supply issues in Copper and Aluminium have supported the base metal prices. Ban on Russian-origin metal at LME (London Metal Exchange) has also supported aluminum prices. In Jan-Feb'24, China's crude steel production declined by 1.9% YoY to 257MT, supporting steel prices. The outlook remains supportive for metals, with the Fed rate cuts being key. A probable stimulus from China can support further rallying in metals. Our top picks are Hindalco, Tata Steel, and Coal India.

Sanjay Moorjani, Research Analyst, Samco Securities, also expects the demand momentum to sustain in the near term.

The Nifty Metal outperformed all other indices in April, surging 11 percent. A significant catalyst behind this surge was the positive manufacturing data originating from China. China’s Manufacturing PMI has been on a consistent rise for the past six months. Given China’s status as the world’s largest consumer of metals, the uptick in manufacturing activity directly translates into heightened demand for metals, consequently boosting Indian metal stocks. Additionally, the domestic market is witnessing increased demand for metals driven by the real estate boom, the government’s infrastructure activities and defense spending. We expect the demand momentum to sustain in the foreseeable future and maintain a favorable outlook on stocks such as SAIL, Hindalco and Hindustan Copper.

Read here: FPIs turn net sellers worth ₹8,671 crore in April after 2 months of buying

On the contrary, Parthiv Jhonsa, Lead Analyst (Metal and Mining), Anand Rathi Institutional Equities, believes the short-term rally has now been priced in.

The price rally in April was due to concurrent events occurring globally. For instance, aluminum rallied after Russian metals were sanctioned on the LME and the CME, and Copper, which hovered around $8,150-8,450 a tonne in Jan-Feb’24, touched $10,000, driven by supply constraints at mines and greater demand from new-age sectors such as RE, EV, industrials, grid infrastructure, data centers, etc.

Though prices may not drop to CY23 levels, we believe the short-term rally, particularly in aluminum and zinc, has been priced in.

Meanwhile, price signals for non-ferrous metals exhibit a mixed trend. Global inventories of lead and zinc are at multi-year highs, and the aluminum and zinc three-month forward premiums to spot premiums are below average. Considering aluminum is widely used in vehicles, consumer durables, and high-tech industries, prices above $2,600-2,650 may not be sustainable as affordability becomes a challenge.

Read here: After a strong FY24, only 3 IPOs list in April, 2 trade above issue price

Even though copper inventory is similar to those in CY20 (mainly from higher stocks built up in China), we reckon the recent rally is more of a global structural story. Greater demand from new-age sectors such as RE, EV, industrials, grid infrastructure and data centers, along with constraints in ore supplies are expected to keep prices elevated.

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