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Metals stocks correct 1-7% amid rising fears of coronavirus on global growth

Metals stocks took a beating on February 24, correcting 1-7 percent as the number of infected from China’s coronavirus continued to rise spreading to other countries as well.

The Nifty Metal index fell nearly 4 percent, the biggest loser among sectoral indices.

Jindal Steel & Power, Vedanta, JSW Steel, SAIL, Hindalco, Tata Steel, Hindustan Copper, NALCO, MOIL, NMDC, Coal India, Welspun Corp and APL Apollo Tubes were down 1-7 percent.

China, which is the largest consumer and supplier of several commodities including metals, has been fighting with novel coronavirus more than a month now. The virus has already taken lives of over 2,600 with more than 77,000 infected cases in the world’s second-largest economy.

The most worrisome part is that the novel coronavirus called COVID-19 has now spread to nearly 25 countries with South Korea witnessing the biggest spike in infected cases. Other countries such as Japan, Philippines, Hong Kong, Australia are also seeing a rise in the number of coronavirus cases.

The worst affected remains China where thousands of factories were shut down putting millions of lives on hold. Even though some of the factories have reopened, analysts remain cautious about the progress at these factories/plants.

The International Monetary Fund’s Managing Director Kristalina Georgieva said the spread of China’s coronavirus outbreak to more than 25 countries could put global economic recovery at risk.

“China is not a major trade partner of India with regards to metals but its sheer size and global market share would impact pricing and profitability of various global commodities and indirectly impact Indian metal companies,” said Kotak Institutional Equities.

China’s commodity consumption and export dominance have increased exponentially in the past two decades. In 2003, China accounted for just 20-22 percent of global commodity production. However, over the past 17 years, China’s share in world demand and production has increased to around 50 percent.

“Base metal demand has taken a bigger hit than supply in China due to the COVID-19 issue. China is a net exporter of aluminium and a net importer of zinc. This would suggest a greater impact on zinc global market balance than for aluminium. However, the food and beverage industry is impacted significantly and 11 percent of domestic aluminium demand is linked to the F&B industry. Thus, the supply-demand imbalance could worsen in the case of both aluminium and zinc,” Kotak said.

India is the net exporter of both aluminium and zinc. Domestic and export prices both are directly linked to LME prices and have been under pressure due to potential increase in global surplus led by China (and global) slowdown, it added.

Among the base metal Indian companies, Nalco’s earnings have the highest sensitivity to metal prices followed by Vedanta, Hindustan Zinc and Hindalco, the brokerage feels.

China consumes two-thirds of global traded iron ore. Out of total 1.5 billion tons of traded iron ore, 1 billion is consumed by China.

“Thus, lower imports by China have already resulted in surplus outside China and significant pressure on iron ore prices. Weak iron ore prices will impact merchant miners such as NMDC while cost deflation would benefit steel companies,” Kotak said.

China is a net steel exporter (50 million tons annually or 6 percent of ex-China demand).

“China demand has been impacted more than supply, resulting in higher domestic inventory and pressure on domestic prices. Weak domestic steel prices in China and lower iron ore prices outside China have started impacting steel prices outside China too,” said Kotak.

“Domestic steel prices in India are driven by import-parity pricing and should come under pressure with a lag of 30-45 days. Lower steel prices directly impact earnings of all steel producers. Margin impact would be partially offset by cost deflation from lower iron ore prices, if any,” it added.

Kotak feels among the four major steel companies (JSPL, JSTL, SAIL and TATA), earnings of SAIL and Tata Steel are more sensitive to steel prices at they are more integrated in their operations followed by JSPL and JSTL.
Source: Money Control

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