The Nifty metal index is on a outstanding run because the starting of February, surging 62% so far. Even the second wave of the coronavirus pandemic has failed to clamp down on the rally in the metal index. The up-move has been aided by an enhancing commodity cycle, soaring steel costs, and robust demand. Domestic brokerages, foreign brokerages, and even the Big Bull Rakesh Jhunjhunwala have time and once again voiced bullish views on metal stocks. Further, the current tax transform in China is anticipated to assistance the up-trend.
Commodity cycle, Chinese emission reforms help metals
Metal stocks have been beneficiaries of robust demand by many sectors and supported by the government’s infra pipeline. De-leveraging and Capex have aided the momentum. Further, China’s push toward carbon neutrality is set to drive international costs larger. “Our China Materials team believe this will lead to an upward trend in the cost curve and supply disruption for heavy power-consuming and high-emission industries such as steel and aluminium, driving more upside potential to these commodity prices,” Morgan Stanley stated in a note earlier in March.
With the objective of going carbon neutral and decreasing emissions, China has now removed a rebate on worth-added tax (VAT) charged on exports of many steel solutions, generating exports much less desirable, according to CLSA. The brokerage firm highlighted that in China, import tariffs on pig iron, crude steel, recycled steel raw components, ferrochrome and other individuals have been reduce to zero. Meanwhile, export tariffs have been raised to 25% for ferrosilicon, 20% for ferrochrome and 15% for higher-purity pig iron. “With global steel production picking up due to increased ex-China demand and a production shift from China, iron ore prices could remain supported,” CLSA stated.
More space for price tag hikes
Domestic steel costs have enhanced not too long ago but nonetheless stay at a discount to imports. “Domestic steel mills have hiked HRC/CRC prices by Rs 4,000/4,500 per tonne in May to Rs 67,000/80,000,” Motilal Oswal stated. Domestic steel costs are trading at a discount of Rs 8,000/t to the landed price of imports, implying space for additional hikes, they added. CLSA, stated that Indian steel mills could boost costs by Rs2,000-4,000/tonne quickly, with one more hike probably in mid-May or early June.
Stock picks
CLSA stated TATA Steel remains its leading choose in the sector. Since the Union Budget, Tata Steel shares have surged 79% to now trade at Rs 1,075 per share.”We see important upside possible to our and consensus estimates for steel stocks as the existing estimate of a sharp reduction in steel costs is unlikely to play out in the close to term,” they stated.
Meanwhile, Motilal Oswal has SAIL on its radar. SAIL stock price tag has sky-rocketed 132% because the Union Budget. “SAIL is our preferred play given its higher sensitivity to prices, on account of greater operating and financial leverage, as well as attractive valuations,” Motilal Oswal stated in a current report.