Metal and mining stocks have proved their mettle this year as the ongoing war between Russia and Ukraine attracted investors towards the sector. Data shows that the BSE Metal index (up 13 per cent) has outpaced the benchmark equity index BSE Sensex (down 4.78 per cent) on a year-to-date basis till March 2.
According to market watchers, Russia is a commodity powerhouse and a net exporter in many countries. Any supply-side disruption in the country will mount prices of metals including aluminium, nickel and steel, among others. At present, aluminium and nickel are hovering at their record high level of $3,824 per tonne and $ 28,797, respectively. Russia produces 6 per cent of the world’s aluminium and 10 per cent of the world’s nickel.
In the BSE Metal index, Hindalco Industries has gained the most 26 per cent to Rs 599.80 till date against Rs 475.60 on December 31 last year. It was followed by Jindal Steel & Power (up 18 per cent), Tata Steel (up 16 per cent), Vedanta (up 14 per cent) and Hindustan Zinc (up 11 per cent).
Edelweiss Securities said, “We expect the ongoing Russia-Ukraine tensions to keep LME (London Metal Exchange) prices high. We maintain ‘Buy’ on Hindalco and Vedanta. All in all, we see earnings momentum of non-ferrous companies sustaining on the back of robust (and increasing) metal prices.”
On the other hand, Motilal Oswal Financial Services believes that sanctions on Russia will impact the prices of aluminium, nickel, steel, thermal coal, and PCI coal positively. In addition, it will lead to cost escalations because of alternative sourcing, delays in establishing new sources, delays in payments and consequent deferrals in shipment releases among others.
In terms of global trade, Russia currently accounts for around 9-10 per cent of global aluminium exports, 11-12 per cent of nickel exports, around 20 per cent of thermal coal exports, and 12 per cent of global steel trade (excluding intra-regional trade). Shares of Coal India have also jumped 27 per cent YTD to Rs 184.85.
There are expectations that thermal coal is likely to find support from investors again as Europe increases consumption of thermal coal in its bid to reduce its reliance on Russian gas. Global thermal coal trade in 2019 was around 987mt of which Russia supplied 170mt and accounted for around 19 per cent of world exports. Russia accounted for around 47 per cent of EU coal imports.
“We believe several European countries are likely to resume thermal power plants as a medium-term arrangement before completely moving away from Russian gas until their goal of 100 per cent renewable source of power is achieved. This will likely push coal prices higher for several years, as we do not expect the EU to revive coal mining,” Motilal Oswal Financial Services said.
In 2020, Russia was the second-largest crude producer globally with 9.86 million barrels per day (mbpd). It was also the fourth-largest steel producer in the world with 73.4 million tonnes per annum (mtpa), competing closely with Japan (third largest with 83.2 mt) and India (second with 99.6 mt). It was also the third-largest aluminium producer (at 3.6mt) and the third-largest nickel producer (at 250 kilo tonnes) in the world.
Motilal Oswal Financial Services believes that Hindalco, NALCO and Coal India are expected to benefit from rising commodities prices. “We expect steel prices in Europe to rally and remain elevated and Tata Steel is likely to be the key beneficiary of the same. The key risk to our call is curtailment in consumption at high prices resulting in a sharp commodity price correction,” the brokerage added.
VK Vijayakumar, chief investment strategist, Geojit Financial Services also added that even in a declining market there will be safe spots like IT, metals and high-quality stocks which will not be impacted by rising inflation and higher interest rates.”
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