Metal scrips' downside seen limited

Shares of domestic metal producers are likely to extend the 3-6 per cent fall Thursday in reaction to reports of sharp decline in global demand for metals, analysts said. But some expected the fall to halt soon and the shares to move along with the rest of the market.

"The fears of China slowdown hitting metal demand in the coming quarters has led to the metal shares fall," said Rahul Jain, analyst at Angel Broking.

Wednesday, aluminium prices plunged 6 per cent and copper prices fell 10 per cent in the overseas markets, according to Enam Securities in a note issued yesterday.

The metals sector was dragged down by bearish forecast by Australia's BHP Billiton that copper supply worldwide will exceed demand in the second half of 2004 as more production comes on line.

The International Copper Study Group Tuesday said copper use in China, the world's largest consumer, dropped 21 per cent in July from a year earlier.

According to Enam the correction in metal prices was because of profit booking by funds that had built huge positions a few weeks ago.

Here, Tata Iron and Steel share fell 3 per cent from its previous end to roughly Rs 285, Steel Authority of India 3 per cent to Rs 47 and National Aluminium Company 6 per cent to Rs 170, and Hindalco Industries 6 per cent to Rs 1,241.

In recent months, these shares have risen in line with bullish trend in the metals market.

Analysts such as Jain said the shares of these leading Indian metals producers could steady because of optimism about their earnings, which are expected to be detailed in the next two weeks.

"As far as the earnings goes there seems to be no change in the outlook for the near term," Jain said. "There could be sentiment-led buying seen in metal shares on announcement of earnings."

He also said that the fall of over 6 per cent in Hindalco "looks like an over reaction".

In fact, Enam advised buying the shares of the two aluminium companies. "We believe that Nalco and Hindalco are expected to see higher volume growth over the next two years and we reiterate our buy recommendation on Nalco and Hindalco," its note to clients said.

On the charts too, strong support was indicated close to the current levels. According to Arun Kumar, a technical analyst at Refco Sify Securities, Tata Steel has a good support at around Rs 275, Nalco at Rs 165, Steel Authority at Rs 44 and Hindalco at Rs 1,180.

An analyst at another brokerage said at current levels Nalco looked fairly valued as it is expected to report earnings per share of 16-18 rupees for the financial year that ends in March and 18-20 rupees for the next year.

However, analysts at two other large securities firms were pessimistic about the share prices.

One expected a small rise after yesterday's big fall. But he advised against investing in metal shares until at least a further fall of around 2-3 per cent .

The second analyst was sceptical about the recent rise in metal share prices sustaining amid "The unidirectional movement of rising metal prices, rising crude oil price and rising equity markets".

"I would wait for the detailed earnings to be announced shortly and then take a call on the metal shares," he said.