After an impressive rally of nearly 22% in calendar year 2022, the Nifty Metals index has seen modest returns of 18% so far in 2023. The performance was hindered by several challenges: a strong US dollar, subdued global demand, cost inflation, and China’s delayed economic recovery. China’s pivotal role in the metals market means its economic shifts have significant bearing on demand and pricing in the sector.
For instance, declining steel prices in China influenced Indian market trends. The price of domestic steel, or hot rolled coil, in December stood at about ₹55,100 per tonne, a 5% drop from levels seen at the beginning of the year, as per data from SteelMint. Besides weak global demand, domestic steel prices were pressured by increased steel imports. Not only realizations took a hit, but margins also remained tight. Price of coking coal, a key input used in the production of steel, has risen 4% through 2023, according to data from CoalMint. Iron ore, another key raw material, has also seen a rise in its prices.
Yet, there is hope that domestic steel prices won’t decline further. Demand for the metal in the Indian markets is healthy. For perspective, finished steel consumption rose by 14% year-on-year during April to November, according to data from the Ministry of Steel. Further, imports are likely to ease as the premium of Indian steel price to landed imports has declined from 11-14% in October-November to just about 5% in the spot, said analysts at Jefferies India in a report on 20 December.
With a potential uptick in construction activities in the coming months, domestic steel prices are expected to firm up. Moreover, the government is working on Production Linked Incentive (PLI) scheme 2.0 for the steel sector and is also looking at ways to ensure adequate raw material supply for the industry, with an aim to make the sector globally competitive. All said, a significant rise in steel prices is not expected in 2024 as the recovery in the Chinese economy is likely to be gradual at best.
Aluminium is another case in point, prices of which are unlikely to see any hasty surge next year. The average price of aluminium on the London Metal Exchange stood at $2,164 per tonne in December. This is down nearly 14% from the levels seen in January. Aluminium prices, too, bore the brunt of subdued demand. According to JM Financial Institutional Securities, the China aluminium market is in a surplus, which means demand lags capacity. The broking firm believes that China-led demand would bring in an overall balance to the markets and that would be driven by infrastructure spending and expansion in green sectors. This augurs well for prices.
Overall, while there are near-term uncertainties, commentaries from major global players signal a positive outlook regarding demand recovery during 2024, said the JM Financial report dated 19 December.
Among other metals, the average price of copper and lead on the London Metal Exchange in December fell by 7-8% from the levels seen in January.
Nonetheless, despite these stumbling blocks, steel stocks such as Tata Steel and Jindal Steel & Power have outperformed the Nifty 50 index, albeit marginally, while shares of JSW Steel have lagged the benchmark. On the other hand, shares of aluminium producer Hindalco Industries have been an outlier with the stock up by 29% so far in 2023.
Looking ahead to 2024, the metals sector may benefit from a more favourable macroeconomic environment in developed economies and stability in China. Potential Federal Reserve rate cuts could further aid demand recovery. However, the extent of impact these developments would have on the metal prices remains to be seen.
