Nifty Metal Index jumps 25% in Nov on domestic rally, demand from China

Metal companies have posted one of their best-ever monthly performances. The Nifty Metal index jumped 25 per cent in November, while the Nifty gained 11.4 per cent. Steel majors Steel Authority of India (SAIL) and Tata Steel each jumped more than 40 per cent this month. We look at the key reasons for metal stocks being on investors’ radar. The biggest driver has been the rally in steel prices in the domestic market.

Rally in the metal

The gain in share prices has been supported by the rally in commodity prices. “Steel prices in India have rallied by Rs 4,000-5,000 per tonne (10-13 per cent) in November. Hot-rolled coils (HRC) has gained 10 per cent to Rs 47,000 per tonne and rebar jumped 13 per cent to Rs 44,000 per tonne,” point out Motilal Oswal analysts Amit Murarka and Basant Joshi in a note. They say there is scope for further gains. “Despite these hikes, domestic HRC prices are trading at par to the landed cost of imports from South Korea, raising the possibility of further hikes in December 2020.”

China factor

The gain in domestic steel prices is on firm ground as the demand and pricing in China has improved. “Domestic hikes are being supported by higher regional prices, which in turn are being driven by a sharp rise in the Chinese domestic steel prices. China HRC and rebar prices are up 10 per cent and 11 per cent in the last two months to $622/599 per tonne,” say Murarka and Joshi. The demand for steel in the world’s second-biggest economy has been on the rise since April, supported by top consuming construction and auto sectors. China’s domestic HRC prices are not at a two-year high.

Improvement in spreads

Domestic steel spreads are at a three-year high. While iron ore prices are at a five-year high, imported coking coal prices are down 35 per cent year-to-date. This has helped keep overall raw material costs in check. “As a result, domestic steel spreads are strong at Rs 33,000 per tonne for HRC and Rs 30,000 per tonne for rebar. On average, spot spreads are Rs 6,000 per tonne is higher than Q2FY21. Assuming spot prices sustain, spreads in Q3FY21 are expected to be higher by Rs 5,000 per tonne for flats and Rs 3,500 per tonne for longs, which should largely flow through to Ebitda as conversion costs have been largely unchanged,” say the Motilal Oswal analysts.