Metal demand and prices remain tepid; rising valuations pose a risk
The uptick in metal stocks in the past three months may begin to taper off as valuations soared and while metal demand is weak.
The Nifty Metal index jumped about 9.6% in June after the covid-19 pummelling. Some metal stocks have even seen a good rebound of about 30-40% since March lows.
But the sharp run-up amid an all-round slowdown in demand is a worry. Domestic metal prices are weak. In fact, prices of hot-rolled coil steel have slipped again last week as offtake in the construction and auto space is yet to show a revival. According to analysts, the average prices of hot-rolled coil in east India has slipped to its lowest levels in eight months.
Furthermore, companies are expected to announce further discounts on July prices set to be announced next week. “Lacklustre domestic demand continues to plague the sector with even restocking demand substantially down owing to upcoming seasonally weak period. Major steel mills are likely to announce prices for July sales next week; however, our channel checks indicate that there could be higher discounts to spur domestic sales,” said analysts at Edelweiss Securities Ltd in a note to clients.
Of course, companies are banking on exports to keep the domestic metal industry afloat during these covid-19 times. While realisations are better, prices in the international market have remained sombre with not much activity being seen in the Chinese markets. Chinese hot-rolled coil prices have rebounded, it still remains below the pre-covid levels.
Companies have been ramping up their production after the lockdown restrictions were eased which will further flood the market with steel amid a low demand scenario. Stocking activity increased at dealers end, but it will mean more inventory in the market. This could keep the pressure on metal prices in the domestic market.
“Visibility for 2020 is limited, primarily for top-down reasons. This drives us to adopt a more cautious stance on the steel sector’s margin outlook,” said Siddharth Gadekar, analyst, Equirus Securities.
The increase in valuations has come after stocks were beaten considerably. With earnings likely to slip further, these valuations will continue to shoot up in the coming months. As a result, the already expensive metal space may begin to look extremely overpriced. Needless to say, some caution is warranted.