Metal Sector Rally of 2020-21
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After the most unusual year, 2021 is experiencing an incredible stock market rally in one of the most cyclical sectors i.e., metals and there doesn’t seem to be an end. NIFTY Metal Index has come all the way to 5700 levels with approximately 170% returns on a per annum basis. This can be ascribed to the record-breaking surges in the global prices of almost all industrial metals which is evident in the graph given below.
As ironic as it may sound, such an important sector representing economic growth experienced such a tremendous hike amidst a pandemic.
Let’s figure out why.
Many decisions are taken universally due to environmental pressures, which directly impact the metal and steel industry. China being the largest manufacturer of steel (accounting for over 50% of the world’s supply) encountered a clampdown on some smelters for implementing its plan of going green by 2025. Having said that, the largest steel manufacturing province in China- Tangshan city restricted productions of over 23 steelmakers, bound to impact 2% production in 2021. Adding to that, India’s dire need for liquid medical oxygen for almost 3 months (March-May 2021) led to the diversion of the steel industry’s captive oxygen plants to the production of medical oxygen for making up for its drastic shortage.
Needless to say, these verdicts have ensued supply-side disruptions, and reviving demand together with this led to upheaval of prices.
However, on the other hand, this emerged as an opportunity for India’s steel manufacturing companies to spearhead demand worldwide. Moreover, they were also given due importance by leading economies such as the Eurozone, China, UK, US, and Japan with the reopening of tight lockdowns. Joe Biden’s $2.3 trillion plan and China’s removal of import duties for encouraging steel imports are also noteworthy. There has been a massive demand for metals due to significant investment in electricity grids, railways, renovating buildings, electric vehicles, and solar panels (for the adoption of low carbon technologies). Likewise, the Indian Government’s focus on infrastructure development brought a huge jump in the steel consumption numbers which can be seen in the graph below.
Furthermore, it is somewhere suspected that China was hoarding steel in 2020. Even when their plants were operating at 90% capacity in June 2020, they imported steel which can be another reason for demand escalation.
Thus, this widening demand-supply gap has ushered high prices and therefore, a rally in the Indian metal space.
The rising prices of raw materials played a crucial role in the price hike of steel. Iron ore being one of the major raw materials, jumped from INR 2560 per ton in April 2020 to INR 6560 per ton in April 2021, thus showing a 156% rise. This can be blamed on the shortage of supply as small miners had to shut down due to stringent lockdown. On the other side, firms like Tata Steel and SAIL in India, who mine their own iron ore, exported the major input. India’s iron ore exports increased by 66% between January and April, with 90% of its shipments to China, leading to a shortage of iron ore in India. This turned out to be lucrative for the exporting firms but made small secondary steel players suffer.
Another raw material that India imports in large quantities is coking coal. Due to various geopolitical concerns, China stopped the import of coking coal from Australia, causing anguish among Australian miners who relied on Chinese revenue. However, after China's episode, demand stabilized, resulting in a two-fold increase in price in just three months, bringing it to $219.5 per ton. Thereby, making it more difficult to cater to the demand side of steel lately.
Furthermore, the supernormal profits made by India's leading steel companies were utilized to lower the aggregate debt by nearly Rs. 35000 crores. Tata Steel's EBITDA, for example, increased to INR 161 billion in March-June from INR 6.3 billion the previous year. As a result, the surge has been aided by corporations' consistent positive results.
The table below shows the list of best performing Indian companies in this rally -
With all the reasons aforementioned on one hand, we know how huge corporations and investors in the metal industry enjoyed one of their best eras.
On the other side of the coin, there are some serious impacts because of this current frenzy.
Numerous MSMEs had to close down their production units and many are on the verge of closure. They demanded government intervention for the regulation of steel prices. Though some concessions were provided by the government, they stood irrelevant in the face of ‘Atmanirbhar Bharat’.
The continuous rise in the prices of raw materials led to increasing costs of real estate development and infrastructure projects making a lot of them unviable.
The auto sector is among the worst-hit sector due to these soaring commodity prices. Numerous auto manufacturers have increased their prices multiple times, thus ultimately impacting the common Indian consumers.
The Future Outlook
High volatility is expected in the cyclical sector. A correction is imperative to ensure the accuracy of the industry’s fundamentals. Although, it seems unlikely looking at the current scenario.
Kunj Bansal, CIO of Karvy Capital says “ it’s very difficult to comment on whether the peak has come for the prices or not.”
Currently, there are two sets of opinions regarding the future of commodity prices.
1st opinion.
The analysts opined that the reasons for the rally to continue no longer exist. The demand-supply gap has been shortened since, with the production rate being only 4% below the pre-Covid peak and the recent slowdown in the demand from China. Also, China’s decision to suppress speculative trading has led to a dip in the prices of the commodity since May.
2nd opinion.
On the other hand, some researchers still believe that strong demand due to the reopening of economies' disrupted supply and expectation of a super-cycle can play its role in helping the rally to go on for a considerable amount of time. The recent $1 Trillion infrastructure bill by the US and other stimulus packages by various economies can be expected to mark this year for the highest demand for steel. Furthermore, rising prices of iron ore will help companies like Tata Steel and SAIL earn more supernormal profits, inducing the rally even more. This school of thought can also be supported by the futures market which suggests an increase of industrial metal prices by 50% in 2021.
That’s all for this week! We hope you liked it and would love to know your thoughts in the comment section. This article is written and curated by Sashank Suraiya andPrapti Kedia.
(Sashank Suraiya is a 2nd year student pursuing B.Com(H) at St. Xavier’s College (Autonomous), Kolkata and a Junior Associate of the Xavier’s Finance Community.)
(Prapti Kedia is a 2nd year student pursuing BMS at St. Xavier’s College (Autonomous), Kolkata and a Junior Associate of the Xavier’s Finance Community.)
References
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