Stocks of metal firms outshine broader market

BSE Metal Index is up as much as 30% in last three months versus a 12.3% rise in Sensex

Metal stocks have begun to outperform the benchmark indices even though they remain a laggard on a long-term basis. The BSE Metal Index is up nearly 30 per cent since the beginning of May as against a 12.3 per cent rally in the S&P BSE Sensex during the period (see adjoining chart).

The metal index tracks the movements in the market capitalisation of metals and mining firms such as Tata Steel, Hindalco, JSW Steel, NMDC, Vedanta, Hindustan Zinc, National Aluminium, and Steel Authority of India.

But the metal firms, unlike the broader equity market, are yet to recover from the Covid-19 shock. The BSE metal index is still down 18 per cent since the beginning of the calendar year 2020 as against a 9 per cent decline in the benchmark index during the period.

The recent rally in metal, mining stocks has been fuelled by a simultaneous one in industrial metals such as copper, aluminium, zinc, and nickel.

The London Metal Exchange Metal Index (LMEX) is up 22.4 per cent in the past three months and has outperformed the domestic equity markets during the period. The index is now in the green for the year, unlike the equity indices. The LMEX is up 2.1 per cent since the beginning of the this calendar year versus a nearly 9 per cent contraction in the Sensex during the period. The LMEX tracks the prices of six base metals — aluminium, copper, zinc, lead, nickel, and tin — but the first three metals together have a 90 per cent weighting in the index. Higher LME prices usually translate into higher realisations and margins for metals and mining firms.

Analysts expect this rally to sustain for at least a few quarters more, given a recovery in the global economy.

“We have been bullish on the metal and mining sector, given that industrial production is on the upswing across the world and the purchasing managers’ index (PMI) for manufacturing is over 50 in most of the major economies. It will translate into greater demand for industrial metals and ores during the rest of the current calendar year and next year,” said Dhananjay Sinha, director and head of institutional research, Systematix Group. He expects the rally to continue for 12-18 months, allowing metal firms to catch up with their long-term underperformance compared to the broader market. Sinha’s firm has a buy call on JSW Steel, Hindalco, and NMDC.

Others, however, question the sustainability of this rally, given the tenuous nature of the global economic recovery and growing cases of Covid-19.

“The rally is likely to fizzle out and it’s the best time for investors to book profits in metal stocks,” said G Chokkalingam, founder and managing director, Equinomics Research & Advisory Services. He expects muted demand for industrial metals for the next two years. “Most big economies, with the exception of China, will report an 810 per cent decline in their GDP in CY20 or FY21. The expected recovery in CY21 or FY22 will at best restore output to the CY19 or FY20 level, which means no growth for two years,” he said.

The long-term link between industrial growth and fortunes of metal firms is clearly visible in their poor performance in the last decade. In the past five years, the BSE Metal Index is up just 12 per cent on cumulative basis as against 35 per cent appreciation in the Sensex. They have done even worse on 10-year basis. The BSE Metal index has nearly halved in value in the past decade. The index is current trading around 8,700 versus a level of around 16,000 in May 2010.

Metal prices have also underperformed compared to equities in the past decade, though they did better than the stock price of metal and mining firms. The LMEX is down 12.6 per cent in the last 10 years, as against 43 per cent cut in the BSE Metal Index during the period.