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On March 5, the first trading day in India after news of the imminent imposition of US tariffs on steel and aluminium broke on March 1, frontline metal stocks plummeted by 2.6-4.5 per cent as investors were unnerved by the prospect of dumping in non-US markets, especially by China. That slump was extended further, and the stocks ended the week with 6-14 per cent losses.
Minimal impact
While the import tariff decision by the US (excluding Canada and Mexico) will definitely distort global trade and create short-term volatility, the long-term impact is expected to be marginal, said analysts. According to Kotak Institutional Equities, the largest steel exporters to the US include Canada, Brazil, South Korea, Mexico and Russia, which together account for about 60 per cent of the exports to the US; India and China have 2 per cent share each. “China’s and India’s exports are focussed on Asia,” added Edelweiss.
China’s steel industry utilisation is expected to improve to 82 per cent in 2018 from 80 per cent led by capacity cuts and closure of induction furnaces (low-grade steel). China’s steel exports declined to 4.7 million tonnes for January 2018, the lowest since 2013.
In case of aluminium, the share of China and India in US’ imports is 9 per cent and 2 per cent, respectively, according to analysts’ reports. While global ex-China aluminium markets are in large deficit, production in China will be absorbed by an equal amount of demand, according to analysts.
Buy metal stocks on dips
The movement in international prices of both steel and aluminium is primarily driven by the demand-supply situation in China; there are no concerns on this front from China. Hence, a correction in metal stocks could make for good entry points for long-term investors as analysts don’t think the decision by the US will affect India or even China.
Given the analysts’ expectations of target prices, a majority of the metal stocks could fetch returns of around 30 per cent (except Steel Authority of India and JSW Steel).
“Tata Steel and Steel Authority of India are domestic market-focussed, with exports accounting for a mere 6-7 per cent of overall sales volume, though Tata Steel’s European operations may be impacted. While exports account for 25 per cent of sales volume of JSW Steel and JSPL, they are largely focussed on South-East Asia and Africa,” noted an Edelweiss report.
“In case of aluminium, due to regulatory uncertainties in Canada, Novelis (Hindalco) is likely to be impacted. Vedanta, though dependent on exports for incremental volumes, is relatively insulated as the bulk of its exports are to South East Asia,” it added.
There are expectations that the US may soften its stance towards other countries also based on bilateral negotiations. If that happens, metal stocks could be on fire again.
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