Explained: What’s driving the ongoing uptrend in metal stocks?

Prices of industrial metals reached record highs in the previous trading session due to growing supply concerns and optimistic long-term demand, sparking a new wave of speculative buying. Copper, often considered an economic indicator, surpassed $11,000 per ton for the first time on the London Metal Exchange (LME) on Monday.

This widely traded metal has seen significant gains in recent months, driven by investors anticipating deepening supply shortages. The most-traded July copper contract on the Shanghai Futures Exchange touched a record high of 88,940 yuan per ton in the previous session.

Also Read: Copper prices hit all-time high to break March 2022 record; what's driving the rally?

Copper on the LME has surged by 28% this year, while SHFE copper has increased by 25%. SHFE copper inventories remain low compared to the beginning of 2024, despite May typically being a period of strong copper demand in China.

Nickel prices have also risen sharply, nearing $21,000 per ton in the previous trading session, marking their highest level since September 2023. This surge is attributed to investor concerns over potential supply disruptions due to heightened tensions in New Caledonia, according to recent media reports.

Other industrial metals have seen notable increases as well: aluminum rose to $2,628.50 per ton, zinc jumped to $3,070.50, lead increased to $2,316, and tin advanced to $34,625 on the LME during Monday's trade. 

Also Read: Gold hits new record high on rising US Fed rate cut expectations, renewed Middle East concerns

Precious metals also reached new highs in the previous trading session. Spot gold prices soared to a record $2,450.49 per ounce. So far this year, gold prices have risen over 18%, outperforming equities and bonds.

Silver prices (spot) surpassed $32 per ounce for the first time since February 2013 during the last trading session. This year, spot silver has surged by 32%, outperforming gold and becoming one of the best-performing major commodities. The rally in silver prices has been fueled by robust investment and industrial demand.

Also Read: Hot Commodity Silver Sets Pace as Demand and Deficit Drive Rally

Boost from Chinese stimulus 

Although metal prices have been steadily rising in 2024, traders received a significant boost last week after China, a major consumer of industrial metals, announced measures to support its crisis-hit property sector.

On Friday, China introduced significant measures to stabilise the property market. These initiatives include easing mortgage rules and encouraging local governments to purchase unsold homes for conversion into affordable housing to address oversupply and prevent defaults by distressed developers.

Also Read: China's Housing Crash Could Set Back Millions of Promising Careers

The measures involve lowering down-payment requirements for homebuyers and allocating 300 billion yuan ($42 billion) of central bank funding to assist government-backed firms in buying excess inventory from developers. Overall, the country will issue 1 trillion yuan ($138 billion) of ultra-long special sovereign bonds this year. 

The real estate sector, a major contributor to China's GDP, has been struggling since the COVID-19 pandemic. Revitalising this sector is crucial for boosting consumer confidence and spending, as well as replenishing the depleted finances of local governments.

Stabilising the real estate market would also help the economy reduce its reliance on the geopolitically sensitive export market. Although China's GDP exceeded expectations in Q1 2024, most of the growth was driven by exports, while domestic demand remained weak.

Also Read: China's GDP growth beats forecasts in Q1, but concerns linger over base metals' outlook

The decline in China's new home sales has accelerated in recent months, with households increasingly preferring to buy in the secondary market. This shift has pushed the stock of unsold homes and empty land to its highest level in years, discouraging new construction and threatening more defaults by developers, including large state-owned firms, according to media reports.

The latest initiatives unveiled by Chinese authorities followed data indicating stronger-than-anticipated factory output. However, there was an unexpected slowdown in retail sales, and the property sector continued to weigh on the economy. China has been initiating fiscal and monetary measures to bolster the economy, addressing challenges posed by the housing crisis and subdued consumer confidence.

Analysts have previously indicated that additional measures are needed to bolster the Chinese economy, which has set an ambitious growth target of around 5% for 2024. 

Despite significant monetary and fiscal efforts to revitalise the property market, the data shows little improvement, as evidenced by the continued decline in home prices.

Meanwhile, China's industrial output grew beyond expectations, rising 6.7% year-on-year in April 2024, compared to market forecasts of 5.5% and faster than the 4.5% gain in the previous month. This growth was supported by improving external demand.

Rate-cut expectations bolster confidence

Metals also rallied amid expectations that the US Fed might implement a rate cut. Last week's data indicated a moderation in inflation, leading traders to anticipate a 65% chance of a US rate cut by September.

Investors will be closely monitoring the minutes from the Fed's last policy meeting, set to be released on Wednesday, along with comments from various Fed officials.

In addition to the expectation of a rate cut by the US Fed, other major central banks are signaling their willingness to lower interest rates. Bank of England Governor Andrew Bailey hinted at possible rate cuts as soon as next month, while Sweden's central bank recently implemented its first interest rate cut in eight years.

Nifty Metal index sets new highs 22 times

Indian metals stocks have been rallying sharply, driven by expectations that the strong surge in metal prices will boost company margins. Stable production costs combined with higher selling prices are anticipated to lead to increased profits per unit sold.

Also Read: Hindustan Zinc stock outperforms 6-year growth in mere 9 sessions, up 48%

The Nifty Metal index hit another all-time high of 9,818 points in today's session. This milestone marked the index reaching a new record high approximately 22 times this year, reflecting sustained momentum and investor confidence. Notably, the index recorded fresh record highs on 10 occasions in April alone.

Also Read: Nifty Metal spikes over 1.5% on US Fed rate cut hopes; Hindustan Zinc hits record high

Among individual stocks, Hindustan Zinc shares have gained 101% so far this year, while Vedanta, MOIL, NALCO, Jindal Steel, SAIL, NMDC, and Coal India have all jumped between 30% and 87% during the same period.

Impressively, Hindustan Zinc's market capitalisation surged over Rs1.36 lakh crore in 2024 alone. Overall, the market capitalisation of seven companies, including Hindustan Zinc, Vedanta, Hindustan Copper, Steel Authority of India, Jindal Steel & Power, NALCO, and NMDC, has jumped by ₹3.13 lakh crore in CY24 so far.

Disclaimer: We advise investors to check with certified experts before taking any investment decisions.