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Jefferies has lowered its optimism on Indian metals as we enter 2022 as weak macro and demand concerns in China are weighing on metal prices. Although easing policy could lift Chinese demand, it still finds risk-reward much inferior to a year ago.

“After a year-long rally, global steel and aluminum prices have softened on weak macro and demand concerns in China. China PMI is bottoming and policy could ease, but there is still risk of muted Chinese growth given the significance of property sector to metal demand. The backdrop for metals is better than the last decade as decarbonization in China should limit exports," the note stated.

The brokerage believes that Chinese demand is structurally shifting from urbanization and industrial development to new economy infra such as renewables and EVs. This should drive a shift from steel and coal to copper, aluminum and other 'energy transition' metals. 

Jefferies has downgraded Tata Steel (target price: 1,240) from Buy to Hold as it believes stock is unlikely to perform until earning visibility improves. It has also downgraded JSW Steel (target price: 600) from Buy to Underperform. 

Though, it likes Novelis' downstream business, and prefers aluminum to steel, thus retains its Buy rating on Hindalco (target price: 660). It has retained Hold recommendation on Coal India (target price: 160).

“FY23 cash flows for Tata Steel/Hindalco should remain strong driving further deleveraging; ROEs should also be above the respective FY11-20 averages. Stocks, however, have high correlation to consensus earnings trajectory, and we believe steel earnings cycle is inflecting down," it added.

Analysts at Jeffries find Novelis also well-placed for the global shift to aluminum from steel in autos, and from plastics & glass in beverage cans. For 2022, they are most bullish on copper and aluminum.

The views and recommendations made above are those of individual analysts or broking companies, and not of Mint.

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