Rally in Metal Stocks to Sustain?

Fri, 22 Apr Pre-Open

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After being in the doghouse for quite some time metal stocks have had some respite recently. The welcome breather comes as stocks in the metal space have witnessed an upward rally in the last one month.

As an article in Economic Times states, metal stocks such as JSPL, Hindalco, Tata Steel, Vedanta and JSW Steel rallied between 10-30% in the past one month. The gains here have outperformed the BSE Sensex, which rose by around 4% during the same period.

There are three main reasons behind this rally. One is the recent rally in the prices of base metals such as iron and copper. The rally in metal prices is witnessed on the back of a weak dollar overseas. The dollar has tanked nearly 5% in the last one month and this has aided the commodity prices.

Second are signs of improvement in China's industrial sector, a major contributor to global metal demand. The improvement has added to the positive sentiments.

Third can be the steps taken by the government to limit cheap imports into India. Most of the surge in metal stocks was followed after the government imposed a provisional safeguard duty of 20% on import of certain categories of steel. Also, this measure was followed by the introduction of a fixed minimum import price on 173 steel products in February. Along with this the government extended the safeguard duty till March 2018.

So going by the above trend and developments, can we expect prices of metal stocks to increase in the coming days?

We think that it would be too early to conclude that. This is because there are still many headwinds that remain ahead for the metal companies. One shall note that metal companies are sitting on huge debts. And this has hit their profitability levels. Apart from this, there is oversupply on a global level and the domestic steel industry is still recovering from aggressive dumping from China.

So going by fundamentals, the indicators may suggest that the present rally is on shaky grounds.

The recent developments may provide some room for the uptrend to continue. However, eventually the prices of these metal stocks should converge to their intrinsic value.

Also, we have never believed in investing based on such macro events. One should instead follow a bottom-up approach to investing that focuses on the analysis of individual companies rather than the economy as a whole. Investing solely on the price outlook of a stock, on the other hand, can always be risky.

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