Metal stocks shine as China relaxes Covid-zero policy

Mumbai: Shares of Indian metal mining and production companies surged 1-5% on Monday as reports of widespread easing of Covid lockdown restrictions in China prompted traders to build bullish bets. The BSE Metal Index jumped 2.4% with Hindalco advancing 4.5% and Tata Steel gaining 3.4% in an otherwise listless day for the Indian equities. The Sensex ended almost unchanged over the previous day.

"The current upmove in metals is more of a catch-up rally after having underperformed for a while," said Hemang Jani, head, equity strategy, broking and distribution, Motilal Oswal Financial Services. "What has fuelled the interest in metals is a mix of decline in the Dollar index and events in China."

As many as 12 Chinese cities reportedly loosened Covid-related restrictions, a positive sign for an economy that has been grappling with strict virus measures for over two years. China is the top importer of various metals and minerals.

Jani expects another 5-10% rally in these stocks even though predicting the medium-to-long-term path for the sector remains tricky. NMDC, Jindal Steel Power, Hindalco, and Nalco are his top picks.

Hindalco's shares closed at ₹481.45 on the BSE, helping it turn positive for the year after losing half its value between April and June this year. The stock touched a high of ₹636 in March-end and came crashing - mirroring a sell-off in India and global equities - as the US Federal Reserve and global central banks began to tighten monetary policies to rein in inflation.

"Still early days," said Pankaj Pandey, head of research, ICICI Securities. "China easing restrictions and opening its economy is positive news for the global economy which will have a positive rub-off on commodities and Indian metal companies."

Indian companies trade around 5-6 times their one-year forward EV-to-ebitda. "Valuations are not a challenging factor, but the outlook for metal companies is more important," he said.

Jindal Stainless and Hindalco are his top picks, said Pandey.

On Monday, state-owned Nalco rose 2.8% while Coal India rose 2.1%. China is the world's largest producer and consumer of coal.

In November, the government removed the export duty on steel and iron ore, which came as a relief to investors. But, analysts do not expect the scrapping of export duty to revive the prospects of the sector.