Steel stocks shine on demand uptick hopes

The Nifty Metal Index jumped over 4% to settle at 2,269. Tata Steel gained 6.6% to end at ~397, while SAIL ended 6% higher at ~37. JSW Steel rose 3% to ~235

Shares of metal companies, mainly steelmakers, soared on Wednesday spurred by hopes of improvement in demand after China’s manufacturing activity in July expanded at the fastest pace in nearly a decade, indicating significant recovery there from the Covid-19 crises.

Further, encouraging data on sales at Steel Authority of India (SAIL) in July, too, boosted sentiment. The Nifty Metal Index jumped over 4 per cent to settle at 2,269. Tata Steel gained 6.6 per cent to end at ~397, while SAIL ended 6 per cent higher at ~37. JSW Steel rose 3 per cent to ~235.

Analysts at Bofa Securities have turned positive on the Indian steel sector because of higher prices and improving demand in China. Domestic hotrolled coil prices, they said, are at a 7 per cent discount, against the landed cost of imports from China, which should support price hikes. Also, China’s net steel exports could fall to an eight-year low of 43 million tonnes (down 9 million tonnes year-on-year, or YOY). This will remove one of the key overhangs and support Indian exports, they said.

In a recent report, India Ratings said pick-up in exports aided the steel sector since the lockdown was imposed, with large firms that were able to operate during that period benefiting the most. Based on provisional data, India’s exports of finished flats, finished longs, and semifinished items, such as billets, were up 105.4 per cent YOY during the June quarter. On a sequential basis, exports were up 56.93 per cent in the quarter.

Bofa Securities said domestic steel spreads (up $30 per tonne over four months) have massively outperformed global spreads (down $11 per tonne). They expect the outperformance to continue as Indian prices rebound in line with global trends, while domestic iron ore remains subdued on overcapacity. The brokerage has upgraded Tata Steel to ‘buy’, with the target price of ~490 a share.