The commodity markets suffered along with other financial markets on account of the US sub prime mortgage concern. The Federal Reserve has made several moves to ease concerns about credit by pouring additional liquidity into the banking system and trimming its discount interest rate to banks. This has brought in stability in the equity markets and metal stocks are among the top gainers on the bourses.
The brokerage houses have lately turned positive towards metal stocks like Sterlite Industries, SAIL and Tata Steel. This comes on the back of a couple of reasons like the stocks had been beaten down too much and looking attractively valued. Also there has been positive news coming in from metal majors like BHP Billliton on recording good numbers lifting sentiment in the local markets and metal prices look stable going ahead.
The global economy remains robust, driven by solid activity in Asia and Europe. Economic fundamentals remain relatively strong. In 2007, real prices for all major commodities remained at or near their highest levels since the 1970s as Chinese demand for raw materials continued.
Over the last year the LME traded metals performed very well. According to a Morgan Stanley research report metals prices are now look firm from a medium-term perspective, although some short-term volatility is still possible.
Aluminium: "We think the Chinese dynamics that have driven aluminium prices in the past three to four years are set to turn favorable for the sector in the coming four to five quarters. In contrast to other metals like steel and copper, an aluminium surplus has been recorded in China for the past five years. The consequent threat – real on some occasions, exaggerated on others – of a surge in exports of the metal from China has caused the aluminum price to underperform peer metals on the LME in the past four years."
Copper: "Copper Concentrate Seem Close to Bottom But Unlikely to Rebound Sharply. In the past 18 months, the spot copper concentrate market has tightened sufficiently to squeeze TC/RC down to close 9c/lb in May 2007 from almost 45c/lb prevalent at the beginning of CY2006. Uncertain supply of concentrate has been the prime driver of the tight situation, exacerbated by increased imports by Chinese smelters in the past year. We are therefore building in an average TC/RC for Sterlite of 13c/lb in F2008 ( from 31c/lb in F2007) and 16 c/lb for F2009."
Zinc: "Zinc prices stabilizing, if not rising. While we do not expect significant upside in zinc prices from here, the market is likely to remain relatively tight in CY2008 on continuing strong demand growth. Even though we project a zinc surplus – albeit modest – in CY2008, we expect inventory levels of 2.3 days of consumption to continue, too low to cause the market concern. Even in CY09, we project only 2.6 days of inventory, which should keep prices above US$2,500 /ton."
Steel: Although steel prices were cut by 2%-5% in July, but the brokeage house is of the view that the monsoon driven seasonal demand slow down is shallower and shorter this year due to strong underlying steel demand in India keeping inventories low and likelihood of of plateauing, or even reduced steel exports from China.
According to Merril Lynch steel prices have done slightly better than its expectations in the current year and we forecast a 4% rise next year in benchmark steel prices versus flat earlier.
So metal stocks can be considered in ones portfolio especially stocks like Sterlite Industries, Tata Steel and SAIL. Morgan Stanley report has given Sterlite Industries a price target of Rs 742 and says it is the most diversified mining company it has well chalked-out growth plans and captive sources of raw materials. Sterlite has exercised the option to purchase the government's 49% stake in Balco and is in the process of doing so for its 25% stake in HZL.
Morgan Stanley report has given Tata Steel a price target of Rs 796 on firmer steel prices and strength in Corus earnings supported by robust steel pricing in Europe.
But the opinion is divided in this case as Kotak Institutional Equitues report says that it has raised its rating to In-Line as risk-reward now appears to be balanced but they haven't turned buyers as yet and are awaiting lead-indicators to point towards improving steel prices.
The report further says, "Steel-prices in US are sharply-down while stable in EU. However, the weakness otherwise continues. We believe Chinese exports will continue and we shall see a sluggish US/EU quarter ahead. We look forward to Tata Steel-Corus consolidated-earnings announcement over the next month. We raise our target price to Rs600/share and revise our rating to In- Line (under perform previously)."
Similarly SAIL was given a buy rating by Merril Lynch with a price target of Rs 182. The report says," SAIL offers ownership of iron ore, strong volume growth, high free cash flow despite capex and is more than 25% undervalued versus global peers on FY08E and FY09E P/E multiples."
The brokerage houses have lately turned positive towards metal stocks like Sterlite Industries, SAIL and Tata Steel. This comes on the back of a couple of reasons like the stocks had been beaten down too much and looking attractively valued. Also there has been positive news coming in from metal majors like BHP Billliton on recording good numbers lifting sentiment in the local markets and metal prices look stable going ahead.
The global economy remains robust, driven by solid activity in Asia and Europe. Economic fundamentals remain relatively strong. In 2007, real prices for all major commodities remained at or near their highest levels since the 1970s as Chinese demand for raw materials continued.
Over the last year the LME traded metals performed very well. According to a Morgan Stanley research report metals prices are now look firm from a medium-term perspective, although some short-term volatility is still possible.
Aluminium: "We think the Chinese dynamics that have driven aluminium prices in the past three to four years are set to turn favorable for the sector in the coming four to five quarters. In contrast to other metals like steel and copper, an aluminium surplus has been recorded in China for the past five years. The consequent threat – real on some occasions, exaggerated on others – of a surge in exports of the metal from China has caused the aluminum price to underperform peer metals on the LME in the past four years."
Copper: "Copper Concentrate Seem Close to Bottom But Unlikely to Rebound Sharply. In the past 18 months, the spot copper concentrate market has tightened sufficiently to squeeze TC/RC down to close 9c/lb in May 2007 from almost 45c/lb prevalent at the beginning of CY2006. Uncertain supply of concentrate has been the prime driver of the tight situation, exacerbated by increased imports by Chinese smelters in the past year. We are therefore building in an average TC/RC for Sterlite of 13c/lb in F2008 ( from 31c/lb in F2007) and 16 c/lb for F2009."
Zinc: "Zinc prices stabilizing, if not rising. While we do not expect significant upside in zinc prices from here, the market is likely to remain relatively tight in CY2008 on continuing strong demand growth. Even though we project a zinc surplus – albeit modest – in CY2008, we expect inventory levels of 2.3 days of consumption to continue, too low to cause the market concern. Even in CY09, we project only 2.6 days of inventory, which should keep prices above US$2,500 /ton."
Steel: Although steel prices were cut by 2%-5% in July, but the brokeage house is of the view that the monsoon driven seasonal demand slow down is shallower and shorter this year due to strong underlying steel demand in India keeping inventories low and likelihood of of plateauing, or even reduced steel exports from China.
According to Merril Lynch steel prices have done slightly better than its expectations in the current year and we forecast a 4% rise next year in benchmark steel prices versus flat earlier.
So metal stocks can be considered in ones portfolio especially stocks like Sterlite Industries, Tata Steel and SAIL. Morgan Stanley report has given Sterlite Industries a price target of Rs 742 and says it is the most diversified mining company it has well chalked-out growth plans and captive sources of raw materials. Sterlite has exercised the option to purchase the government's 49% stake in Balco and is in the process of doing so for its 25% stake in HZL.
Morgan Stanley report has given Tata Steel a price target of Rs 796 on firmer steel prices and strength in Corus earnings supported by robust steel pricing in Europe.
But the opinion is divided in this case as Kotak Institutional Equitues report says that it has raised its rating to In-Line as risk-reward now appears to be balanced but they haven't turned buyers as yet and are awaiting lead-indicators to point towards improving steel prices.
The report further says, "Steel-prices in US are sharply-down while stable in EU. However, the weakness otherwise continues. We believe Chinese exports will continue and we shall see a sluggish US/EU quarter ahead. We look forward to Tata Steel-Corus consolidated-earnings announcement over the next month. We raise our target price to Rs600/share and revise our rating to In- Line (under perform previously)."
Similarly SAIL was given a buy rating by Merril Lynch with a price target of Rs 182. The report says," SAIL offers ownership of iron ore, strong volume growth, high free cash flow despite capex and is more than 25% undervalued versus global peers on FY08E and FY09E P/E multiples."
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