Why is Nifty Metal Shooting Through the Roof?
Nifty Metal is up by 51.2% since the beginning of the FY 2020-21 while Nifty is only up by 3.7%. What’s going on?
The rise has been mainly due to the events taking place in the world of steel. You see, Covid had disrupted the supply chain for steel manufacturing in 2020. The countries producing steel could not ship it to countries that had a lot of demand.
The supply of steel got restricted. But, the demand was still there. How?
The major demand for steel comes from China (more than 50%) and China's economy bounced back right after Covid like a gymnast jumping on a trampoline.
Now, high demand and low supply lead to high prices (Economics 101).
And so, the steel manufacturing companies could sell steel at a higher price. Here's what happened at Tata Steel in Q4 of 2021:
And, what will it do with the extra cash?
Repayment of debts (jargonists call it deleveraging).
Well, steel manufacturing companies are capital intensive and have to take huge loans for expansion.
And, having huge debts is risky for a business when the price of a commodity is low. It could lead to massive losses or increase the risk of default of loan repayment.
So now, hitting a mauke pe chauka, i.e repaying debts when profits are high, is an absolute winner move that steel (and other) manufacturers are making. It safeguards them in the near future.
This is what is leading to the rise in prices of the steel industry, Tata Steel, SAIL, you name them. Here's how various sectors have performed over the last year in the stock markets:
All have gone up - but Nifty Metal steals the show. By a lot!
Also, the government's plans to spend a lot on infrastructure has just fanned the flames to the ride. Higher profit margins, stable demand, lower debt - all are positives for this sector. But, will the rise in share price last in the long run?
It may not. You see, steel manufacturing (or any commodity business) is a cyclical one. Their performance depends on the global demand-supply mismatch.
And so, their stock prices also act in the same manner. Maybe this is just the beginning of the cycle? Or maybe just a temporary phenomenon? What do you think? Let’s discuss this in the comments!
ReadOn Insights: Tata Steel announced its Q4 earnings yesterday (5 May 2021) and it also declared a dividend of Rs. 25 per share of its fully paid-up capital. This will lead to a transfer of funds of a cool Rs. 900 crore (approx.) from Tata Steel to its Promoter company Tata Sons Private Limited. It might use these funds to invest in its tech-first initiatives (buying Big Basket, kickstarting their own apps, etc).