Amber signs continue to flash for metal companies. Rising inventory levels in China and subdued metal prices are driving metal stocks south, which could drag the downturn for a long time.
The highest in the sectoral indices, last month, the Nifty Metal index lost 14.3%. In the past year, against a fall of about 9% in the Nifty 500 index, the Nifty Metal index lost a whopping 32%. Stocks of Steel Authority of India Ltd (SAIL) Ltd, Jindal Stainless (Hisar) Ltd, Jindal Steel and Power Ltd (JSPL), Hindustan Copper Ltd, Tata Steel Ltd and Vedanta Ltd figure among the top losers in the metal index. SAIL has also lost as much as 55% this past year, JSPL 49%, Tata Steel 40% and Vedanta 36%.
Now onwards, the recovery could take longer than anticipated. The auto sector continues to grapple with the slowdown, rising inventory and lower sales. The government spends on infrastructure have yet to show signs of improvement. Barring JSPL is the largest companies have either reported lower or flat steel volume growth. However, the steelmakers expecting prices to slip further by about Rs 3,000 per tonne.
Recovery could take as long as the second half materialize. Now, Production cuts which result in an increase in working capital and costs. Also, a Chinese inventory build-up means prices will remain flat or lower for some time. Many metal firms have also expanded their capacities. That would translate into cost increases against a backdrop of lower volumes.
Read EquityPandit’s Nifty Metal Outlook for the Week