Stock Groups

Evergrande crisis no ‘serious implications’ on India metal firms: Analyst


Indian metal companies are unlikely to be seriously affected by the crisis unfolding at Chinese property developer Evergrande, according to financial services firm Motilal Oswal.

China is a key player in the determination of global commodity prices. China’s realty sector is the country’s largest consumer of steel. Therefore, lower steel demand could cause steel prices to tumble.

Shares of Indian steelmakers such as Tata Steel, Steel Authority of India (SAIL), Jindal Steel and Power and JSW have been on a downward trend in recent sessions as Evergrande warned again it could default. The stocks tumbled sharply last Monday before recuperating some of the declines — but on Friday, those shares fell more than 2%.

Nifty’s metal index lost 3.27% last Week.

Recent sell-off in those stocks were more related to a cooling off in certain metal prices, Hemang Jani, head of equity strategy for broking and distribution at Motilal Oswal, told CNBC’s “Street Signs Asia” on Wednesday.

Analysts said that iron ore prices had fallen by 54% in the past five months. Iron ore is used in steelmaking and demand for steel — especially from China — will likely affect prices. Spot prices of other metals, such as lead, zinc, and copper were down too, according to reports by the Commonwealth Bank of Australia.

An exterior view of China Evergrande Centre in Hong Kong, China March 26, 2018.

Bobby Yip | Reuters

“Demand outlook overall remains quite steady and we think that the pricing is something that we will have to watch out, given the Evergrande developments and how serious or how much deeper corrections we can see,” Jani said.

He stated that although we are positive and do not see this as having any significant implications for India’s metal companies, “we remain optimistic.”

Jani said the falling prices of Indian steel stocks is “a buying opportunity” into names like SAIL, Jindal Steel and Power, as well as non-ferrous metals firms like Hindalco.

Evergrande is on the brink of collapse. China’s indebted property developer is trying to make payments and has warned investors that it may default on its debts.

China in focus

China’s property sector had historically made up a large portion of the country’s commodity demand, according to the Commonwealth Bank of Australia report, which estimated that property construction accounted for about 25% to 30% of China’s steel demand.

Vivek Dahar, a bank analyst in mining and energy commodities, said that market attention was firmly focused on China Evergrande’s potential fallout if it defaults in its loan payments due to slowdowns in property sales.

He said that Beijing policymakers are looking at limiting the country’s annual steel production to 2020 to lower emissions. Dhar said that this policy led to China’s decline in crude steel production for July and august, which in turn caused an increase in steel prices worldwide.

Motilal Obswal’s Jani said that while China has a significant role in the pricing of steel, India’s revival is driving this sector’s growth. These corrections “may not last,” Jani said, speaking of Indian steel stocks.

Impact on Indian metal players

Because of the measures China undertook even before the Evergrande issue, the overall pricing environment was “quite good,” Jani said.

Let’s now see how the issue turns out. Jani said that China has taken additional measures and will be monitoring the pricing impacts on Indian metal stocks.

There are a few factors that could work in India’s favor for metal producers.

These include the steady improvement in India’s economy over recent months due to government policy toward infrastructure projects. With Covid-19 lockdowns gradually lifted, construction and manufacturing activities are also on the rise.

Jani believes that India would benefit from infrastructure investment by the state.