Metal stocks rally may have more legs2 min read . Updated: 15 Dec 2020, 01:15 PM IST
- China remains the largest consumer of commodities and demand is expected to grow there. Demand for steel in the world's second largest economy is likely to rise further in mid-low single digits during 2021, say analysts
MUMBAI: The strong recovery post easing of lockdowns and gains thereafter seen by metal stocks this year may continue in 2021 too. Even as most of the metal stocks are trading near 52-week highs, analysts see some more upside in them.
The fundamentals on demand remain favorable and the news flow on vaccine progress is driving the confidence. The global economy is set for revival and this should help demand and prices for most of the commodities.
China remains the largest consumer of commodities and demand is expected to grow there. Demand for steel in the world's second largest economy is likely to rise further in mid-low single digits during 2021, say analysts. Steel prices should continue their northward journey, they believe. The same is to be driven by stimulus and an increase in credit by the government. Steel utilisation is likely to remain at 90% through 2021, supporting prices and spreads, both in China and elsewhere in the region, say analysts at CLSA.
A stronger Chinese currency and strengthening of emerging market currencies too is positive for rally in metal prices.
All the said fundamentals should also allay concerns of investors who are watchful on correction in metal prices. With the upcoming Chinese New Year, holidays can have some bearing of demand in the near term and investors need to be watchful. Any correction in stock prices will be an opportunity to add stocks, say experts.
The fact that leading brokerages are revising up their forward earnings estimates should further aid investor confidence.
CLSA has upgraded steel and metal price assumptions and hence raised Ebitda estimates for their coverage universe by 1%-19% for FY21-23.
Tata Steel features amongst CLSA's picks with full iron ore integration in India as rising prices in Europe augur well for the company's second half profitability. Further positives could accrue in case of a potential deal to sell its European assets. The deleveraging is likely to continue even without the sale of European assets, say analysts.
Hindalco remains the obvious pick of most analysts in the non-ferrous space.
Amongst mining companies, rising base metal prices should bode well for Hindustan Zinc while NMDC too remains well placed for gains because of rising iron-ore prices. Coal India, on the other hand, is also rebounding with rising demand and improving realisation in the country. Increasing share of power generation from natural gas and renewables however hurts longer term thermal coal demand outlook.