Metal stocks, steel companies make the most of weak rupee

Global steel prices expected to remain stable as demand likely to pick up, base metals to stay under pressure

Metal stocks have risen 22 per cent over the past three months. After being beaten down, stock prices of metal firms have largely moved up on expectations of higher realisations due to a weak rupee. A weak rupee has come to the rescue of steel companies in particular, as it has made imports expensive and forced domestic consumers to look at higher import substitution. More and more companies are looking at replacing expensive imported steel with domestic steel. So, even as overall steel consumption fell two per cent year-on-year in October to 5.8 million tonnes (mt), steel production rose 2.6 per cent compared to last year, to 6.6 mt. Tata Steel, for instance, has reported higher volumes despite weak demand in the domestic market.

According to Edelweiss Securities, the key reason for higher production was fall in imports by nearly eight per cent year-on-year. Since April, production of steel has risen 5.4 per cent to 46.6 mt compared to last year. This was largely driven by a 73-per cent drop in net imports, even as actual consumption remained flat at 42.4 mt. In October, Tata Steel, Jindal Steel and Power, JSW Ispat, JSW Steel and SAIL reported finished steel production growth of 8-28 per cent year-on-year, claim analysts, while Essar Steel and Rashtriya Ispat Nigam reported a fall in production.

  So far, metal prices have been declining globally. but a weak rupee has helped in supporting domestic prices. However, in November, steel prices have continued to rise and are expected to remain at current levels. On a week-on-week basis, long product prices have been strengthening. Emkay Global’s Goutam Chakraborty believes steel prices may not see any sharp fall from here on, even though base metals continued to weaken on global uncertainties. Aluminium, lead and zinc have declined over the past fortnight.

Analysts are not very bullish on base metal stocks as the outlook on global commodity prices remains weak. The overhang on global commodity prices is primarily due to two reasons. First, the risk to global commodity prices is a possible slowdown in China. Second, any pushback in dollar liquidity would negatively impact commodity prices. Nomura, which had gone overweight on metals in August, has closed its recommendation and now has a underweight rating on metals now. The brokerage believes the expectations of higher realisations due to the rupee’s fall has been factored in and further upside is capped. It continues to have a long-only position on Tata Steel. Broadly, analysts believe the outlook for ferrous metals remains stable.