Analysts turn cautious on metal stocks as coronavirus fears escalate

With fatalities due to Covid-19 (coronavirus) fanning across the globe, weak consumption and supply chain disruption stemming from China look imminent. Add to this the sharp decline in metal prices, the near-term outlook for the sector looks weak.

Most analysts now have turned cautious on the sector – at least till the time there is clarity on the damage caused due to the health scare. In this backdrop, most analysts have started revising downward their growth forecasts for China and the world economy.

The impact of these developments has been more pronounced on commodities. Between February 1 and 15, prices of agricultural produce, metals, energy and industrial raw materials fell between 5 per cent to 20 per cent. Base metals and oil prices have been particularly hit. The Bloomberg Base metals index has dropped 10 per and Brent by 17 per cent since the outbreak began late last year. Further, regions shut down by China to contain the virus account for about 90 per cent of copper smelting, and 60 per cent of steel production, estimates Bloomberg.

“We expect non-ferrous metal and mining companies to continue with the slide in Q4FY20. Average Aluminum / Alumina / Zinc / Nickel prices are down by $10/$7/$101/t/$2100 quarter-on-quarter, reflecting the continued weakness in the sector. We believe that unless a massive dose of stimulus is injected into the economy, the recovery in China shall be slow and muted,” Vishal Chandak, an analyst tracking the sector at Emkay Global Financial Services wrote in a recent report.

At the bourses, the Nifty Metal index has cracked 12 per cent year-to-date (YTD), as against a 3 per cent dip in the benchmark Nifty50 index till February 25, data show.

“China remains at the core of the commodities market… A drop in growth to 5-5.5 per cent in China due to Covid-19 can drag the entire global growth in the first half of 2020,” said analysts at Nirmal Bang.

Investment strategy

Despite near-term headwinds, analysts believe that the long-term growth outlook for the sector remains intact on the back of various government initiatives, strong domestic demand of iron and coal, and mining auction.

“While we are seeing production and logistics being hit due to factory shut down in China, we can also see inventory build-up. There are mixed signals for the sector and we need to wait another 10-15 days to see the impact,” says Narendra Solanki, head of research at Anand Rathi. Though Solanki expects stocks to remain under pressure in the near-term, he suggests long-term investors stay put.

“Even as we expect China steel prices to weaken in the near term, we expect it to unleash a stimulus package to rejuvenate economic growth stalled by both trade war with the US and Covid-19 outbreak. This should support commodity prices in the medium term,” said analysts at Emkay Global.

Vikas Jain, a senior research analyst at Reliance Securities, however, remains skeptical of the recovery in the near term and advises investors stay on the sidelines for now.

“The sharp up-move in the dollar index beyond 100 levels would put further pressure on commodities. While we see some minor pullback in the Nifty Metal index by around 4-5 per cent to 2,600 levels, we still would advise to have some time wise correction over the next two months before committing any fresh exposure to the sector,” he says.