Here’s Why Metal Stocks Are Rallying In Trade

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Shares of domestic steelmakers and other metal companies rallied as analysts expect a price hike and improvement in earnings.

“Our channel checks with traders suggest that they are expecting another steel price hike to the tune of Rs 2,500-4,000 per tonne on different product categories in January,” PhillipCapital said in a note. The brokerage attributed the anticipated price hike to tight supplies, good demand and increasing international prices.

“Overall sentiment is strong as the fourth quarter is traditionally the strongest with respect to steel demand,” the note said.

The Nifty Metal Index gained as much as 3.1% on Monday to trade at its highest since November 2018. The gauge is gaining for the fourth straight session. All but two constituents are trading with gains.

Also, Jefferies expects metal companies to report an earnings rebound in FY22. The research firm’s global metals and mining team expects global steel capacity utilisation to hit a decade high of 81-82% and iron ore to remain in deficit in 2021-22.

The rising demand for steel and steel products was evident in Jindal Steel & Power’s monthly business update. The company reported its highest ever production and sales in December. Production rose 30% year-on-year, while sales increased 25.4% to 7.11 lakh tonnes in the reported month. The company’s Angul, Raigarh and Patratu plants reported record monthly production. During the October-December period, the steelmaker’s production rose 20%, while sales increased 12% year-on-year.

Besides, Indian benchmark hot-rolled coil steel prices, according to Jefferies, rose 56% in 2020, led by the sharp rally in Asian prices. “Spot prices are 38% above the second quarter average, which should drive strong margin expansion, especially for Tata Steel Ltd., given captive iron ore in India,” it said in its note.

Valuations for Tata Steel and Hindalco Industries Ltd., Jefferies said, are still attractive, despite the rally since September. The financial services provider has also highlighted Tata Steel as one of its top 10 stock picks for 2021. “Tata Steel’s sale of its Netherlands plant can drive value unlocking and a renewed focus on India can drive re-rating,” Jefferies said in the note.

The research firm has raised its price target for Tata Steel to Rs 850 apiece from Rs 800 apiece, while that of JSW Steel to Rs 450 apiece from Rs 430 apiece.

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