Metal stocks rallied in an otherwise flat market on April 18. The S&P BSE Metal index, in the morning session, traded at 20,359.39 levels, up 1.56 per cent. In comparison, the S&P BSE Sensex quoted at 59,611.22 points, down 0.19 per cent lower. However, the stocks pared gains toward the end of the session. At close, the S&P BSE Metal index stood at 20,132.18, up 0.43 per cent.

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All the constituents of the metal index were trading in the green with Jindal Steel (up nearly 4 per cent) being the top gainer. Nalco, Tata Steel, and SAIL were next on the list (all up 2 per cent). An increase in metal prices, as well as encouraging China's auto output is among the major factors behind metal stocks' rise. 

China's auto output and sales saw 15.3 per cent and 9.7 per cent year-on-year (YoY) growth in March 2023, Global Times reported quoting data from the China Association of Automobile Manufacturers (CAAM), while exports maintained strong momentum with a 110 per cent growth year-on-year. Besides, the exports of new energy vehicles (NEVs) in March stood at 78,000, up 3.9 times over 2022 levels.

As per Bloomberg data, LME aluminium prices increased 2.2% QoQ in 4QFY23 while LME zinc prices increased 4% QoQ in 4QFY23. Average domestic HRC/rebar prices have increased by around 6% QoQ. Also, HRC prices across regions improved on China's reopening sentiment in 4QFY23, as per Steelmint data.

 

That apart, Palladium Spot was trading over 1 per cent higher at $1,625/ ounce at the time of writing this report while Platinum, as per Trading Economics, has risen 8.86 per cent in the last one year. It must be noted that automakers use platinum and palladium to neutralise harmful exhaust fumes from combustion engines. In addition to this, prices of industrial metals such as lead, aluminium, tin, zinc, and nickel have seen an uptick in the last few days.

 

Further, as per a Reuters report, tin prices jumped on Monday (April 17) on news of a possible production halt in Myanmar, the world's third-largest producer of the soldering metal. London Metal Exchange's three-month tin jumped by 11 per cent to hit a two-month high of $27,705 per tonne.

What analysts say

The tug-of-war between a slowdown in the West and Chinese recovery will, as per analysts, continue to weigh on Indian metal equities. However, steel companies' margins in 4QFY23 should recover to mid-cycle levels on a sequential basis and risk-reward is attractive at current valuations. "We expect the aluminium market to remain in surplus, whereas cost support is fading with declining coal prices. We forecast aluminium prices to remain range-bound and find risk-reward unfavourable for aluminium producers," Sumangal Nevatia, research analyst at Kotak Securities wrote in a co-authored note with Siddharth Mehrotra on April 5. 

Further, steel volumes should see moderate (3 per cent YoY) growth on a high base. The brokerage has assigned an "Attractive" designation to the Metals and Mining sector.

Echoing similar views, analysts at ICICI Securities say steel companies are likely to report a sequential increase in EBITDA/tonne of nearly Rs 1,850 to Rs 2,250/tonne, primarily aided by an uptick in steel prices. On a QoQ basis, for the quarter, blended steel realisations are expected to increase by nearly Rs 2,000 - Rs 3,000/tonne.

For Tata Steel, the brokerage expects that while standalone EBITDA/tonne is expected to witness an improvement on a QoQ basis, muted performance from Tata Steel European operations is expected to result in a limited uptick in consolidated EBITDA margins. 

"On the volume front, for the quarter, steel firms (except JSW Steel) under our coverage universe are likely to report flattish volumes on a YoY basis. JSW Steel, on the other hand, is likely to post double-digit volume growth for the quarter. On a sequential basis, steel firms are likely to report volume growth in the range of nearly 8-13 per cent QoQ," ICICI Securities said in a Q4 preview report issued on April 12. Hindalco and Coal India are the top picks of the brokerage. 

Non-ferrous metals outlook

Aluminium companies are expected to see a sequential improvement in prices, aided by lower coal costs, whereas higher zinc prices and volume uptick should aid margins for zinc producers. Zinc/aluminium/alumina prices increased 4%/2.2%/13.5% QoQ in 4QFY23 in US dollar terms, while the rupee was stable against the US dollar, Kotak Securities notes. 

Here is how the companies are expected to fare in Q4

Hindalco: The company's India's EBITDA is estimated to increase sequentially to Rs 23.6 billion (-42% YoY, +26% QoQ), whereas Novelis’ EBITDA should see recovery (US$ 420/ton, -3.8% YoY, +11.8% QoQ) after hitting a trough in 3QFY23.

Nalco: Estimated EBITDA of Rs 6.4 bn (-60% YoY, +40% QoQ), mainly due to higher commodity prices during the quarter.

Hindustan Zinc: The company's EBITDA is expected to increase 12.2% QoQ (-16.2% YoY), mainly due to higher metal prices, partly offset by lower hedging gains.

Vedanta: The brokerage forecasts a 30 per cent QoQ increase in EBITDA (-36% YoY) due to sequentially stronger commodity prices across its key segments—zinc, aluminium and oil.