Top 5 Stocks Riding the Metals Rally. Do You Own Any?

As economies reopen in various parts of the world, prices of commodities have soared, including the prices of industrial metals.

The increase has been broad-based - copper is up over 80%, iron ore is up over 100%, and nickel is up over 40%.

On the back of these rising prices, metal stocks have had a phenomenal run in the last one year and continue to soar.

Here are the top 5 stocks riding the metal rally.

#1 SAIL

Shares of SAIL have been up almost 330% in the last one year.

As the largest producer of steel in the country, the company was the beneficiary of soaring steel prices, robust demand by various sectors, and the government's focus on infrastructure.

As a result, the company recorded its best-ever performance in both production and sales during the financial year 2021.

It also deleveraged its balance sheet. In line with its focus on reducing borrowings, the company reduced its net debt from Rs 161.3 bn in 2020 to Rs 153.5 bn in 2021.

SAIL continues to reap the benefits of higher steel prices, despite a wage revision impact.

With steel prices at a record high, the company is poised to post its best-ever EBITDA/tonne of Rs 20,000 in the June 2021 quarter.

#2 Tata Steel

Tata Steel shares rallied 260% in the last one year on the back of rising steel prices.

Like SAIL, Tata Steel too deleveraged its balance sheet. The company repaid Rs 300 bn of its net debt in the last financial year.

In its latest quarterly results, the company reported better than expected numbers on the back of improved realisations in the domestic market.

Going forward, an optimistic global economic outlook, and reduced supplies from China could push steel prices higher.

Against this backdrop, Tata Steel would be the key beneficiary on the back of its integrated operations.

#3 Hindustan Copper

Riding on the back of buoyant copper prices, Hindustan Copper (HCL) shares jumped over 350% in the last one year.

HCL is the only vertically integrated copper producer in India engaged in a wide spectrum of activities ranging from mining, beneficiation, smelting, and refining.

The company expects copper concentrate, not refined copper products, to be its primary product in the future.

It is also in the process of expanding its mining capacities from approximately 3.9 m tonnes per annum (MTPA) as of 31 March 2020 to 20.2 MTPA.

Trafigura Group, the world's top copper trader, and Goldman Sachs have both said that copper prices could hit US$15,000 a ton in the coming years. Bank of America has said that US$20,000 could even be possible if drastic issues arise on the supply side.

#4 NALCO

Shares of NALCO rallied over 140% in the last one year, as rising aluminium prices continued to boost the company's earnings throughout the year.

Earnings were also supported by revenue from the alumina segment.

The company posted a nine-fold jump in net profit in the March 2021 quarter.

The company's aluminium segment revenue jumped 19% sequentially and 72% year on year (YoY) to Rs 19.4 bn. Aluminium production volumes at 112,000 tonnes rose 10% YoY.

Aluminium prices on the London Metal Exchange (LME) averaged US$2,093/tonne during the quarter, sharply higher from US$1,694/tonne a year ago.

Going forward, favourable aluminium price movement is likely to continue driving the performance of the company.

#5 Vedanta

Vedanta's shares have risen over 140% in the last one year on the back of improving operating performance, supported by stable volumes across business segments and high commodity prices.

The mining conglomerate is the only listed Indian company that offers exposure to several commodities at once including zinc, aluminium, lead, silver, copper, iron ore, steel, and crude oil.

Besides, Vedanta also holds around 65% stake in Hindustan Zinc.

A sharp run-up in the stock price of Vedanta has seen the company regain the Rs 1 tn market capitalisation.

With expected volume growth across businesses, sustained cost efficiencies and healthy commodity prices, Vedanta's earnings before interest, taxes, depreciation and amortisation (EBITDA) is expected to improve to more than Rs 350 bn in 2022.

As you can see, metal stocks have been on fire this year.

In fact, Brijesh Bhatia, Senior Research Analyst at Equitymaster, had called it the sector of the year at the start of 2021.

Brijesh is yet bullish on the sector. He believes metal stocks are all set to kick off the next leg of their rally.

Watch this video for more.

How long will the rally in metals last?

Soaring metal prices have sparked a debate on whether the world is entering a commodity cycle or a 'supercycle', an extended phase of abnormally high prices that lasts at least a decade.

Yes, there is a green industrial revolution on the horizon, which will multiply the demand for some commodities.

However, that does not hold for all metals.

Commodity prices bounced back from artificially low levels they touched in the first wave of the pandemic last year.

Lockdowns across the world had created supply bottlenecks and disrupted mining operations, which created scarcity and raised prices. This obviously has nothing to do with a supercycle.

Moreover, the weakening of the US dollar had an impact on commodity prices. When the dollar depreciates, producers in other countries need to increase prices so that their revenue in the local currency does not fall.

As the world's biggest buyer of a range of industrial commodities, China is already using its market heft to curb the sharp rise in global metal prices over the past 12 months.

China's latest move targets copper, aluminium and zinc, among other metals. It has already outlined a program of public auctions to domestic metal processors and manufacturers.

Beijing's move comes as metal prices had already begun to decline in recent weeks, amid market sentiment that global supply levels didn't warrant such rallies.

How this pans out for metal stocks remains to be seen. Meanwhile, stay tuned for more updates from this space.

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