After months of rally, metal stocks took a beating in the past week and the trigger was the comment from China that it will strengthen its management of commodity supply and demand to curb any ‘unreasonable increase in prices’. “Metals have seen one leg of the correction and are expected to remain weak in coming weeks. Since the broader market is still bullish, this segment will see consolidation and not a big fall,” says Sacchidanand Uttekar, Deputy VP, Trade Bulls Securities.
As settlement cycle nears end, scope to book profits
The jump in global commodity prices have started reflecting in domestic inflation. For instance, wholesale price inflation jumped to 10.49% in April from 7.39% in March. It is expected to move up further before coming down. Inflation is becoming an issue in US also and the recent US Federal Reserve minutes hinted about a chance of taper talks in coming meetings. However, market participants are not worried much. “Spiralling US inflation and resultant jump in yield is a worry. However, global market will remain relatively stable now and big moves will happen only if the US 10 yield goes beyond 2%,” says V. K. Vijayakumar, Chief Investment Strategist, Geojit Financial Services.
Next week is also an expiry week and therefore, be ready for increased intra-day volatility. “We may have a fantastic expiry on coming Thursday. However, chance of Nifty going beyond 15,600 is less and therefore, short term traders can start booking profit around that level,” says Uttekar.
(By Narendra Nathan)
New investments dry up as pandemic rages on: While a lot has been said about the rebounding of the economy in the last two quarters of 2020-21, which has resulted in some optimism, the investment picture remained dark. This was expected given that the government appeared to be the main driver here and private sector contribution was limited. First, there was surplus capacity with manufacturing and second, there was uncertainty on the funding aspects. There was a moratorium extended by banks for six months which came on the back of the system just about coming closer to normal after the NPA puzzle. Therefore, there was some hesitancy in lending which can be seen from the limited success of the LTRO operations where most of the borrowed money was repaid by banks when the RBI permitted the same.
CMIE data on investment flags this problem. Data provided on new investment projects announced, which is a very good indicator of investment intentions, shows that the aggregate amounted to Rs 5.18 lakh crore in 2020-21, the lowest since 2004-05 when it was Rs 5.63 lakh crore. The downward movement in 2020-21 has been due to exceptional conditions for sure, but for a revival to take place there will need to be an upsurge in demand. Capacity utilisation rate fell sharply in June 2020 to 47.3% and since then recovered to 63.3% and 66.6% respectively in September and December 2020.
Fewer investments announced is also indicative of the fact that the increase in borrowing witnessed last year, which was subdued, was not for investment and could have been more for working capital as well as re-financing purposes. Investment is a concern because the gross fixed capital formation rate has been declining continuously from 34.3% in 2011-12 to 28.8% in 2019-20 and is expected to go down further to 26.7% in 2020-21.
Investment hence has definitely been a casualty of the repeated lockdowns. While it was hoped that there would be a recovery this year, the second wave of the pandemic seems to be have put paid to such hopes.
With several manufacturing businesses not operating fully as only essential goods can be consumed, there is a likelihood of a slowdown in recovery. Sectors like metals, power, IT and chemicals (including) drugs and pharma will continue to witness momentum. However, for investment to be generalised and not localised, overall consumption has to improve.
(Investments in 2020-21: CARE Ratings)
Steel prices stable for now but fear lurks: Regional prices are well above $1,050/tonne and several players have announced hikes effective Jun/Jul-2021. Domestic steel price (traders’ end) is also stable at Rs 66,750/tonne —still 14% lower than export realisation and 20% lower than landed price of imports from South Korea.
China a concern Recent developments in China aimed at reining in skyrocketing prices of steel/iron ore have caused a flutter in the ferrous market. A few market participants expect the government to ease production curtailments in Tangshan and Handan to push down domestic steel prices, which slid 8–10% in the past week. Near-term volatility in stock prices expected.
Domestic steel price is lower than export realisation
Outlook: It is expected that record-high global steel prices will lift margins to an all-time high in the first quarter of 2021-22. Domestic steel players are at a clear advantage as: i) there is no threat of imports; ii) higher export realisation is likely to ward off near-term domestic demand woes; and iii) lowest realisation in the world is likely to insulate the price moderation, if any. That said, recent endeavours in China to contain steel prices have dampened the sentiment and might result in near term stock price volatility.
While we maintain the positive outlook for ferrous owing to China’s larger goal of limiting steel production to cut down carbon emissions, we will keep an eye out for further developments. Maintain Buy each on our top picks, namely Tata Steel and SAIL.
(Steel prices: Edelweiss)
