Metal stocks top gainers in first half of 2021; can the rally continue?

Most metal and mining stocks have seen sharp gains in the first half of 2021, supported by augmented demand globally amid constrained supply in the wake of the COVID-19 pandemic.

Economic activities were severely impacted globally when the COVID-19 pandemic led to the lockdown phase, but after the lockdowns were lifted and central banks of the world announced stimulus packages, the demand for steel started to recover.

Besides, China’s decarbonisation mission also created a demand-supply mismatch which seems to have augured well for the Indian steelmakers. With fewer steel exports, Indian steel companies have greater freedom to raise prices, moneycontrol reported.

As of June 25, the Nifty Metal index has jumped 61 percent in this calendar year so far, with stocks rising between 10 percent to 217 percent. Shares of Adani Enterprises have surged 217 percent while those of APL Apollo Tubes, Tata Steel and JSW Steel have jumped about 80 percent each.

The Nifty Metal index has outperformed other sectoral indices on NSE this year so far. The benchmark Nifty50 is up 13 percent while the second-best performer among the sectoral indices, the Nifty PSU Bank index, is up 43 percent, the report added

Strong demand scenario after economic activities picking pace amid constrained supply is the biggest reason that boosted metal stocks, said experts.

“The metal prices have rallied since the last quarter of the previous calendar year on account of strong demand from China because of its stimulus package and recovery in global demand post the pandemic,” Milan Desai, Lead Equity Analyst at Angel Broking, said.

“Tight demand-supply scenario has resulted in a sharp increase in prices across steel, copper, and aluminium, aiding profitability of Indian metal companies. Indian metal companies are using this opportunity to deleverage their balance sheet which coupled with a strong earnings outlook has led to re-rating seen in these stocks,” said Desai.

Gaurav Garg, Head of Research at CapitalVia Global underscored the steel industry is benefiting from a favourable demand-supply balance in western steel markets. Steel rates have remained high as a result of all of this.

An increase in the price of metals leads to better realizations for the metal companies, thus enhancing their profits.

The outlook

Analysts are positive about the prospects of the metal sector as metal prices are expected to remain elevated due to increased economic activities and strong demand.

“Outlook for the sector is positive as prices are expected to remain high. Few concerns like China increasing supply, releasing their metal reserves and Fed policy can hinder the stability in prices at high levels which in turn can hurt the metal companies’ profitability bit,” said Nitin Shahi, Executive Director of FINDOC.

“Stay invested in the sector as demand is of no concern over next few years but be flexible and adjust your positions in case of any fundamental change in the sector as companies profitability relies only on metal prices. Other than that any correction in the broader market may impact sentiments,” said Shahi.

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