Comment | China’s surprise recovery lends a shine to metal stocks

The S&P BSE Metal Index declined by 15% in fiscal 2019. But the new fiscal has begun on a brighter note, with the index gaining on Monday.

China’s factory activity grew after a 4-month lull with the official Purchasing Managers Index (PMI) coming in at 50.5 in March, beating expectations. Another survey, the Caixin/Markit Manufacturing PMI came in at 50.8, the strongest expansion in eight months. Of course, a good reading in one month does not signal all is well. But if it sustains in the coming months, March’s reading would have marked a turning point.

What happens to China’s industrial economy is relevant for India. Recently, Crisil forecast that fourth quarter revenue growth for Indian companies will slow down, primarily due to low growth in commodities due to a fall in realisations. It said that rolled steel prices are expected to have been flat over a year ago, while that of long steel and aluminium are expected to decline by 1% and 4% over a year ago.

A more vibrant Chinese economy should also put its consumers in a better mood, which may stoke consumption demand. This could then set in motion a cycle of economic growth, which can pull up global growth. A side note could be a recovery in demand for automobiles in China, which could improve demand for Tata Motors’ JLR stable which has been hit by a decline in China’s demand for automobiles.

The bigger picture for India, however, lies in what China’s recovery could potentially mean for its commodities sector. A recovery in realisations could help the industry absorb higher costs and post earnings growth. If companies remain confident about demand being robust, then this could set the stage for the next round of capital investments by Indian companies. That might give a small push to the private sector investment cycle.

Global central banks appear worried about growth and are easing monetary policy to do their bit to support growth. That usually augurs well for commodity prices. There is one major event that can affect commodity prices, depending on the eventual outcome. The world is waiting to see how the US-China trade talks turn out. The hope is for a patch-up that lets the world economy get back to business. Failure can upset those calculations and signal growth headwinds for commodities.