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Behind the Metal & Mining Stocks Rally: The Bigger Picture

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The Indian Metal and Mining Stocks are on a rally. NIFTY Metal, the benchmark index for metal and mining stocks, is trading at record levels. Amidst the Ukraine-Russia crisis, rising oil prices, damaged supply chain, and high inflation levels, metal and mining stocks have offered great returns in the last 3-4 months. What exactly could be the reason for such a rally?

The Big Picture

The NIFTY Metal index was off for a casual start after the beginning of CY2022. With two consecutive waves of rallies and subsequent profit bookings taking place, we did notice significant gap-down openings towards the end of February. This was around the time when the Ukraine-Russia escalations were fresh, and there was a bear run in the broader markets. 

Consequently, we notice a steep hike in the NIFTY Metal index just a day after Russia declared war on Ukraine. Around this time, NIFTY Metal grew by nearly 16% in three consecutive trading sessions.  After Russia declared war on Ukraine, the NIFTY Metal index moved against the broader NIFTY 50 index, i.e. Nifty Metal rallied but NIFTY 50 stocks tanked. After an abrupt rally, we notice a drop in NIFTY Metal, possibly due to profit booking. 

Why Did The Metal Sector Rally Amidst Global Financial and Socio-Political Tensions?

Rising Metal Prices Would Mean Greater Margins

There was an inherent fear in the market that the Ukraine-Russia crisis would impact the supply chain of metals globally. Eventually, stock prices across the world started to soar. The cost of churning out a metal, be it steel, nickel, aluminum, or copper, remains in a fixed price range. If the market price is greater than the production cost, the producer makes a profit. The fact remains that metal prices have soared to record levels. Indian companies have managed to churn metal while demand was stable. An increase in metal prices can help them bag greater profit margins. 

Weaker Rupee Helps Export-based Segments

A weaker rupee generally tends to benefit exporters. An exporter would get more rupees for every dollar worth of goods exported. The Indian National Rupee (INR) has hit its weakest of all times, crossing Rs 77 for every US Dollar. This means that for every dollar worth of metal that an Indian company exports, it would get more rupees in return. Even if metal prices were to subside, Indian metal players could benefit from exports if the rupee remains weak. 

Potential Gain From Global Supply Shortage

Russia accounts for around 9-10% of global aluminum exports, ~11-12% of nickel exports, 20% of thermal coal exports, and 12% of global steel trade. The ongoing and increasing number of sanctions on Russia could significantly damage its ability to export crude oil, natural gas, and metals. India could potentially use this opportunity and hype its exports in the metal industry. 

What Next?

In the first week of March, Ukraine and Russia organized a meeting in Turkey to discuss a ceasefire. Unfortunately, the talks failed. Oil prices crashed after reaching record highs as UAE pushed OPEC to increase oil production amidst a global call to boycott Russian oil. More production of oil would mean lower oil prices and therefore lower inflation rates. The fact that Ukraine and Russia have both agreed to make ‘compromises’ could have added to the crash in oil prices. 

By now, Indian metal players would already be looking out for opportunities to pump up the export. A rise in international prices could eventually lead to an increase in metal prices in domestic markets. This could make infrastructure projects more expensive. Rising metal prices, a weak rupee, and the potential to capture a missing market seem to have fuelled the current bull run in the metal markets. Investors should look out for other factors like export volumes, sanctions, and the global supply chain to track the metal markets. It is advised that investors perform thorough research before investing in the markets.

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