Gaurav Garg
Performance of metal sector is a key economic indicator which measures the depth of economy. The sector has been underperforming since last few years due to US-China trade deal, subdued growth and muted demand. But what puts further questions on this sector’s growth is impact of COVID-19. Let us try to understand the factors which might play as X-factor for metals along with its outlook.
Primarily, metal sector is struggling with over-supply, lower demand, thus leading to low prices of metals and continuously rising inventories. Now that the lockdown is being lifted in a phased manner, there is a possibility of revival in coming few quarters. However, prices are expected to remain on the muted side until there is a major surge in demand or sharp off-loading in inventory volume. This has put a heavy toll on the stocks and metal index corrected around 65 percent from 2018 highs and made its bottom in March 2020.
As sector is highly dependent on many other peripheral sectors, demand accounted is sizable and directly impacts consuming sectors, hence, the collapse of demand from various industries have left sector stranded. Amidst this crisis, most consumers and industries have postponed discretionary spending, plus there is a muted demand in all industries, barring essentials such as groceries and FMCGs has put a pressure on the sector.
Sectors that are directly affected include white goods, capital goods, automobiles and all these sectors are major consumers of metals. So in a way there has been significant indirect impact on metal sector.
The government's plan to boost infrastructure investments across the country has also come to a halt and it might again pick-up from June. Metal sectors’ revival is very much dependent on how aggressively government resumes its spending on infrastructure sectors and how fast it also stars executing the new projects.
The Modi government has already emphasized multiple times that infrastructure is the top priority for the government which is a silver lining for the sector. However, in the now changed circumstances, it is important to see how the investments pans out in the infra sector.
To compensate for the low domestic demand, steel players are looking for an opportunity to increase their reach into export markets. Currently, China is one of the major exporters of metals in the world and India looks forward to gaining a piece of pie.
The sector comprises both organized and unorganized players, but majority of public listed players are positioned at favorable risk and return. During the lockdown most of the large steel companies such as JSW Steel, Tata Steel, Jindal steel and power, tried to maintain their production, but other companies failed to keep it up and running. Now the major concerns would be shortage of labor as many have returned back to their native states and companies might face a challenge in bringing them back early.
Softening of US-China tensions could be game changer for sector as due to this, metals have been under-performing in last few years. China, being the largest exporter of metals, any trade war could lead to uncertainty and adverse outlook on the sector.
Since the sector has seen the worst and economy is opening up, there is a fair chance that the sector would perform well in short to medium term. Stocks like Tata Steel, Hindalco and Mishra Dhatu Nigam (MIDHANI) are positioned at attractive valuations and might give good returns over the time.
The author is Head of Research at CapitalVia Global Research Limited – Investment Advisor.
Disclaimer: The views and investment tips expressed by investment expert on Moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
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