Rise in copper prices fuels rally in stocks of metal, mining companies

Mumbai: Metal and mining stocks rallied on Monday as copper prices surged in global commodity markets. Riding on the rally, the BSE Metal index gained 1.3 per cent, compared with just 0.8 per cent gain of Sensex.

But stock performance of metal companies is expected to remain muted despite attractive valuations, given the twin overhang of trade brawls and a strengthening dollar, said analysts.

Shares of Vedanta gained 3.14 per cent while Jindal Steel and Hindustan Zinc rose 2.5 per cent each. National Aluminium, SAIL, JSW Steel and Hindalco gained between 1 per cent and 2 per cent on Monday.

Copper prices bounced back strongly on Monday after crashing nearly $1,000 a metric tonne since touching a four-year high on June 7 due to an escalating trade war between the world’s two biggest economies, the US and China.

Analysts believe that ferrous companies are on a stronger wicket on the earnings front led by a favourable domestic supplydemand balance, but they still anticipate headwinds due to the trade wars and a strong greenback.

“Valuations of metal stocks are likely to remain under pressure, given the twin overhang of trade brawls and a strengthening USD index,” said Amit Dixit, analyst, Edelweiss Securities.

“We expect ferrous companies to outpace non-ferrous players on earnings growth for the first time in nine quarters as global steel spreads remain at a record high, and domestic steel consumption in April-May grew 8.5 per cent YoY though India became a net importer for the first time since December 2016,” he said.

The BSE Metal index has grossly underperformed so far this year with a negative return of 15 per cent, compared with Sensex’s 6 per cent gain. Non-ferrous companies faced headwinds on the cost front, particularly coal, crude derivatives and alumina, whereas price growth in base metals showed signs of flattening out.

However, favourable steel prices in both domestic and international markets have resulted in an improvement in profitability for steel players, said analysts.

“Given the ongoing insolvency resolution process of five steel companies which are likely to result in substantial haircuts for lenders, debt levels of the steel industry are expected to decline in FY2019, which coupled with better operating cash flows, is expected to result in an improvement in coverage ratios for the industry in FY 2019 and FY 2020,” said Jayanta Roy, analyst, ICRA Ltd.

Jefferies in a recent note recommended a hold rating for Tata Steel with a target price of ?614, while maintaining its underperform rating on SAIL and JSW Steel.