The Hindu Business Line : After steep fall, metal stocks in consolidation mode

Metal dynamics
Many analysts believe that the present situation, where demand clearly outstrips supply, may last till the end of 2008.
Chinese imports of minerals and energy are likely to grow by 13.5 per cent annually till 2010.

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Kolkata Feb. 20 Metals stocks appear to have entered a consolidation phase on Dalal Street in the last few trading sessions after a steep fall since early January this year. Though metal stocks closed today weak in line with the overall trend in the market, in the short-term perspective, the ferrous and non-ferrous counters have by and large remained in the green.

Among the steel stocks, SAIL held up a weekly gain of over 7 per cent and Tata Steel was up around 3 per cent compared with the level a week ago. In the non-ferrous pack, Sterlite Industries finished in the green today maintaining a weekly gain of over 11 per cent.

Feasibility Studies

After today's closing, down by 1.30 per cent, Nalco's short-term recovery level remained at around 8 per cent, while Hindalco's closing price of Rs 148 still left it with a weekly gain of over 4 per cent. Hindustan Zinc despite loosing 3 per cent during the session managed to hold on to a weekly gain of 5 per cent.

According to local metal stock analysts, though trading could put pressure on the price level in the short-term position, in the medium to long-term (six months to one year period), metal stocks are likely to do well. Many international analysts also believe that the present situation, where demand clearly outstrips supply, may last till end 2008.

According to certain projections, Chinese imports of minerals and energy are likely to grow by 13.5 per cent annually till 2010. Some commodity analysts, however, feel that the need of the hour was to factor in historic price levels, adjusted for inflation, into any feasibility studies rather than current super cycle prices, which to an extent are the result of speculation.

Stable Price

According to Mr Rahul Jain, metals stock analyst at Man Financial, the current super cycle may be propped up by China, and possibly also by India, for at least another 9 to 10 months before any significant capacity addition in the global arena takes place to overtake demand.

"In steel, the emerging consolidation on a global scale has clearly brought about a stable price regime. Moreover, increasing environmental concerns over fresh mining activities have stalled rapid capacity additions, aiding a steady price trend," he added. In the case of aluminium too, the price trend remains healthy providing better margins to manufactures.

Mr Jain, however, said the market had, of late, been factoring in the acquisition overhang for pricing of Hindalco and Tata Steel in varying degrees. "Market's perception of leveraging and profitability in the case of Hindalco's recent acquisition of Novelis has been obviously different from those in the case of Tata Steel's acquisition of Corus," he said.

Interest Rates

Mr Ajay Jaiswal of Angel Broking was of the opinion that short-term movement in the metal stocks might remain choppy, but medium-to-long-term outlook for the local metals stocks appear positive for various reasons including increasing domestic demand owing to higher infrastructure spend across different sub sectors such as ports, railways and housing.

"Globally, the current stability in interest rates has also reduced the possibility of a sudden meltdown which had hit the commodities markets in 2006," he felt.

He said that the speculative premium fetched by non-ferrous metals last year has considerably been wiped out.

"The current price levels appear stable as they are more on account of demand-supply pressure rather than a speculative prop-up," he added.