Metal and mining stocks’ weight touches two-year high on Nifty

Market cap of top 10 firms has risen 33% since January

Metal and mining companies such as JSW Steel, Tata Steel, Hindalco, and Coal India have continued to surprise equity investors with one of the strongest rallies in their share prices in many years.

On Tuesday, the BSE Metal index, which tracks the market capitalisation of the top 10 metal and mining companies, was up 3.5 per cent, against a 1.4 per cent rally in the benchmark indices.

The combined market capitalisation of these companies has risen around 11 per cent so far in April, against a 2 per cent decline in the benchmark BSE Sensex and 1.3 per cent decline in Nifty50. In fact, the top 10 metal and mining stocks’ performance has been even more impressive since the beginning of 2021. Their market cap has risen 33 per cent, against a 7.7 per cent rally in the BSE500 index.

This has resulted in a sharp rise in the stocks’ weighting. The four metal and mining stocks that are part of Nifty50 now have a two-year high weighting of 3.6 per cent, up from 2.6 per cent at the end of December 2020, and from a record low of 2.2 per cent last June. (See the adjoining charts)

This rise signals a sharp turnaround in the industry’s fortunes as it had grossly underperformed the broader market for the better part of the previous decade.

Metal stocks such as JSW Steel and Hindalco Industries are now trading at all-time highs, while Tata Steel’s stock price touched an intraday high of ~953 apiece last Thursday, surpassing its previous record of ~924 apiece reached 13 years ago.

Brokerages expect the good times to continue.

“The domestic ferrous (steel) stocks have delivered returns in excess of 20 per cent over the past five days alone. Even so, the rally has legs. The latest developments in China, i.e. deep production cuts and the possibility of a reduction in steel exports, are propping up sentiment and prices alike,” write analysts at Edelweiss Securities.

Lockdowns have also disrupted mining, production, and transportation in many major ore and metal producing economies.

As a result, hot-rolled steel prices have risen nearly 28 per cent in China since the beginning of 2021 and have more than doubled in the last year. Many traders expect HR steel prices to rise above $1,000 per tonne from the current $817 a tonne.

Similarly, the London Metal Exchange, which tracks the prices of metals such as aluminium, copper and zinc, has risen about 15 per cent yearto-date and 67 per cent over the past 12 months.

Higher metal prices are expected to lead to a sharp jump in these companies’ profits in Q4. Analysts at Motilal Oswal Securities expect these companies to report their highest ever quarterly profits in Q4FY21.

In the past, metal and mining stocks were vital for the broader market. For example, there were five such stocks in the Nifty50 with a combined weighting of 8.3 per cent at the end December 2009.

However, the sector underperformed the broader market consistently over the previous decade because of low metal and ore prices and poor domestic and international demand growth.

Despite their recent outperformance, the combined market capitalisation of metal and mining stocks have risen just 39 per cent over the past decade, against a 205 per cent rise in the BSE500 and a 155 per cent rally in Nifty50. For many analysts, the recent performance indicates the potential upside available in the sector for patient investors.