Metal stocks surge as CLSA predicts recovery amid China's steel capacity cuts

Mumbai: Metal stocks were among the top gainers in Wednesday's trading after brokerage CLSA said the worst may be behind for the sector. The brokerage said China is set to reduce its steel capacity, a move likely to improve profitability for Indian metal companies. Analysts see upsides of 5-15% in the shares. Tata Steel soared 6%, while Jindal Steel surged 5.5%. Steel Authority of India and Hindustan Copper gained 5.3% and 4.7%, respectively. National Aluminium Company, and Hindalco Industries rose over 3% each.

The Nifty Metal Index gained 3.1%, while the benchmark Nifty advanced 0.6% on Wednesday. Out of the 15 stocks in the Nifty Metal Index, 14 advanced and one declined.

"If China follows through with its production discipline and the GST Council delivers on anticipated reforms, the rally in metal stocks has the potential to sustain, supported by firm pricing power and a cyclical recovery in demand," said Divyam Mour, research analyst at Samco Securities.

CLSA said that as part of its "anti-involution" plan, China is set to reduce its steel capacity by 50 million tonnes in CY25, aiming to cut production by 8.5% for the rest of the year.

Top stock picks
The brokerage said JSPL, along with Hindalco and Vedanta, are its preferred picks.

Analysts also said that India has extended the safeguard duty on steel for three more years, a move expected to improve steel prices.

"Companies are expected to take hikes by the end of September which could also support the earnings for Indian metal companies," said Tushar Chaudhari, research analyst at PL Capital, Prabhudas Lilladher. "There is an upside potential of around 10-15% by March from the current levels."

Chaudhari said Tata Steel, JSW Steel, Jindal Steel, and SAIL are the top stock picks in the sector.

So far this year, the Nifty Metal Index has surged 12%, while the benchmark Nifty has gained 4.5% during the same period.

The near-term outlook remains positive, with scope for an additional 5-10% upside in leading metal stocks, said Jateen Trivedi, VP research analyst, commodity and currency, LKP Securities.

"After this rally, the sector may stabilise and consolidate as the market assesses the real progress on semiconductor-related investments," said Trivedi. "However, the demand outlook continues to trend upward, underpinned by policy support and consumption growth."

Trivedi said investors may focus on large and mid-cap names that are direct beneficiaries of higher demand, such as Hindustan Copper, Hindalco, National Aluminium (NALCO), SAIL, Tata Steel, and JSW Steel.

Technically, the metal index has room to extend its upside towards the psychological level of 10,000, analysts said.

"However, the broader structure remains positive, and any corrective phase from higher levels should be looked at as a healthy retracement within the uptrend," said Gour. "Once short-term supply pressures are absorbed, the index is expected to resume its positive momentum, keeping the near-term outlook constructive for the sector."