Metals stocks continued to take a beating on February 28 as inventory levels grew in China due to fast-spreading coronavirus though production has started in some parts of the world's second-largest economy.
China is the largest consumer and supplier of several commodities, including metals. A crisis that hits China has a ripple effect on not only metals but other commodities as well. Crude, for instance, has fallen around $15 a barrel since January, when news of coronavirus cases first began to trickle in.
The BSE Metal index corrected more than 6 percent to 8,322 levels, taking losses in the last one-and-a-half-month to 23 percent.
Vedanta was hammered the most among metal stocks, declining 10 percent, followed by Tata Steel, SAIL, NMDC, NALCO, JSW Steel, Jindal Steel, Hindalco and Hindustan Zinc that dropped 4-7 percent.
The coronavirus has roiled the Chinese economy for almost two months now, with 2,788 deaths and 78,824 infections. The virus that has now spread to all continents but Antarctica has killed 2,858 and infected 83,342 people across the world.
"We are concerned on precipitous steel inventory build-up in China as mills operating on the blast furnace route continued production by utilising raw material inventory accumulated pre-Chinese New Year," Edelweiss said in a February 25 report.
The steel inventory has risen to a record 21.6mt, up 21 percent YoY and 88 percent in the past one month. In non-ferrous as well, SHFE zinc and aluminium stocks have jumped significantly over the past one month.
The auto sector is also a major consumer of metals.
"We expect the auto slowdown to persist as: 1) regions with high infection rates account for 48.4 percent of auto sales and 48.9 percent of production (based on CY19 numbers); 2) Chinese automakers are operating at just 32 percent of total capacity; and 3) China Association of Automobile Manufacturers (CAAM) reported January 2020 sales dip of 18 percent YoY," said Edelweiss.
The brokerage foresees stock price volatility in the near term owing to broadening base of coronavirus, but it is enthused by the first signs of demand uptick in China.
After a tumultuous month, wherein domestic metals & mining stocks corrected 15 percent on average, Edelweiss sees first signs of demand resumption in China: 1) 37.2 percent of major roads and motorways construction projects worth $142 million have resumed; and 2) 42.2 percent of roads and waterways transport companies have resumed operations.
Domestic HRC and rebar prices, after correcting 8 percent and 4 percent, respectively, in a month, have stabilised in China. Furthermore, CFR Vietnam price, after falling 10 percent in the past month, has risen
by $10 per tonne in recent deals.
"For us, the biggest surprise is uptick in Dalian iron ore future index—back at pre-24-January level—possibly on expectations of stimulus by the government of China in order to rev up growth," said the brokerage.
It maintained buy call on JSPL with a target of Rs 225 and Tata Steel with a price target of Rs 570.