Uncertainty over China stimulus leaves metal stocks in a state of flux; clarity to reignite momentum

The Nifty Metal index has shown mixed performance, gaining in six out of the last twelve sessions but edging more than 2 percent lower overall during this period.

The uncertainty surrounding China's stimulus and the roadmap to revive its economy has put metal stocks in a state of flux, leaving investors wondering if it's too soon to celebrate. Initially, China's measures to revive its battered property sector sparked optimism, but metal stocks have since experienced bouts of volatility, becoming highly sensitive to shifting market expectations.

What once seemed like strong upside potential for metal stocks has now lost some momentum. While there’s still hope that China will introduce more robust measures to boost its economy, analysts believe that metal stocks will only see significant bullish momentum once the government provides clear guidance. Until that happens, scepticism lingers, as investors try to gauge whether these measures will trigger a substantial turnaround or remain another shot in the dark.

Why does China's stimulus matter?

China is the world's largest consumer of base metals, significantly influencing global demand for metals. In recent years, Indian metal companies have faced challenges due to weak pricing caused by faltering demand from China, mainly due to its struggling property sector and slow economic growth. As domestic demand in China slowed down, Chinese metal manufacturers turned to global markets, resulting in an oversupply compared to sluggish demand, further pressuring prices. This is where China's stimulus and efforts to revive its debt-ridden property sector come into play.

If China's measures are successful in revitalising its struggling property sector, it will lead to increased global demand for metals, benefiting Indian metal companies. A revival of China's property and manufacturing sectors will particularly benefit Indian steelmakers and iron ore mining companies such as NMDC, Tata Steel, JSW Steel, and Jindal Steel and Power. Steel and iron, essential for steel manufacturing, are the commodities expected to experience the highest surge in demand from a recovery in China's property sector. Iron ore prices have displayed significant fluctuations recently as investors reacted to expectations and disappointments related to China's stimulus.

"The uncertainty surrounding China’s stimulus plans has created a volatile environment for base metals. While the government has made efforts to boost the economy, the timing and impact of these measures are still unclear, fuelling speculation and price swings," said Aamir Makda, Commodity & Currency Analyst at Choice Broking.

This volatility directly impacts metal manufacturers, as their earnings and profitability are closely linked to base metal prices. Recent fluctuations, especially in iron ore prices, have contributed to an inconsistent trend in metal stocks. The Nifty Metal index has shown mixed performance, gaining in six out of the last twelve sessions but edging more than 2 percent lower overall during this period. The sectoral index was also trading in the red today.

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What's happening with metal companies?

Metal companies have faced pressure in recent quarters due to falling prices and weakening demand. For the second quarter, Elara Capital analysts expect all ferrous metal companies like Tata Steel, JSW Steel, and Jindal Steel to report a sequential drop in EBITDA of around 2 percent year-on-year amid weak steel prices. NMDC is also expected to see a decline in EBITDA per tonne by close to 30 percent quarter-on-quarter after raising prices twice in the previous quarter.

Near term outlook for metal companies without China stimulus

While a substantial China stimulus can accelerate the recovery path for Indian metal companies, other factors could trigger a revival by the end of FY25. Analysts at Elara Capital believe that a potential reduction in steel production by China during winter, the expiration of Bureau of Indian Standards (BIS) certification for some steel mills exporting to India, and planned maintenance shutdowns by major mills in South Korea could lead to a recovery in steel prices.

"In addition, the onset of the busy construction season in the domestic market is expected to boost demand, supporting steel prices. Furthermore, lower coking coal and iron ore prices are likely to ease pressure on profit margins, providing relief for steelmakers," the brokerage stated.

Meanwhile, expectations of the government imposing anti-dumping duties on China's steel exports to India could also be another major trigger that lifts domestic steel prices, further strengthening the outlook for steelmakers.

A report by The Economic Times, citing officials, stated that the government could soon expand the ambit of its stringent quality norms amid an increase in large-scale dumping of substandard steel, largely from China. This follows a comprehensive review of local production and imports by the steel ministry in early October, which revealed the sector’s increased vulnerability to global trade diversions, the report added. Stringent quality checks can help curb the surge of imports, as producers seek alternative markets due to ongoing sluggish demand and high tariffs imposed by the US and EU, raising the risk of dumping goods into India.

Bhavik Patel, Senior Commodity Research Analyst at TradeBulls Securities, further believes that Indian metal stocks, which are heavily influenced by international prices, are likely to remain neutral in the short term. Moreover, Patel does not anticipate a significant rally in metal stocks before the end of 2024, though he expects a potential turnaround in 2025.

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