Steel stocks, Nifty metalSteel stocks, Nifty metalDomestic steel prices have increased recently but still remain at a discount to imports.
(Image; REUTERS)

The Nifty metal index is on a remarkable run since the beginning 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 improving commodity cycle, soaring steel prices, and robust demand. Domestic brokerages, foreign brokerages, and even the Big Bull Rakesh Jhunjhunwala have time and again voiced bullish views on metal stocks. Further, the recent tax change in China is expected to support the up-trend.

Commodity cycle, Chinese emission reforms aid metals

Metal stocks have been beneficiaries of robust demand by various 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 global prices higher. “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 said in a note earlier in March.

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With the objective of going carbon neutral and reducing emissions, China has now removed a rebate on value-added tax (VAT) charged on exports of several steel products, making exports less attractive, according to CLSA. The brokerage firm highlighted that in China, import tariffs on pig iron, crude steel, recycled steel raw materials, ferrochrome and others have been cut to zero. Meanwhile, export tariffs have been raised to 25% for ferrosilicon, 20% for ferrochrome and 15% for high-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 said. 

More room for price hikes

Domestic steel prices have increased recently but still remain 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 said. Domestic steel prices are trading at a discount of Rs 8,000/t to the landed cost of imports, implying room for further hikes, they added. CLSA, said that Indian steel mills could increase prices by Rs2,000-4,000/tonne soon, with another hike likely in mid-May or early June.

Stock picks

CLSA said TATA Steel remains its top pick in the sector. Since the Union Budget, Tata Steel shares have surged 79% to now trade at Rs 1,075 per share.”We see significant upside potential to our and consensus estimates for steel stocks as the current estimate of a sharp reduction in steel prices is unlikely to play out in the near term,” they said. 

Meanwhile, Motilal Oswal has SAIL on its radar. SAIL stock price has sky-rocketed 132% since 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 said in a recent report.

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