Why Metal Stocks are Falling

2022 was a nightmare for investors. Indian share markets were wild, turbulent, and volatile.

As 2023 began, investors were hoping for a slightly better year. But on 24 January 2023, Hindenburg a US-based short seller, issued a report on the Adani group.

Post the release, markets were in a downward trajectory.

The effect of the Adani-Hindenburg saga was finally wearing out in March. Investors had barely sighed a breath of relief when the Silicon Valley Bank (SVB) bank collapsed in the US.

As a result, Indian share markets are once again under pressure.

One of the most impacted sectors is the metal sector. Let us take a look into why metal stocks are falling.

#1 Low demand

China and US are two important countries for the metal sector. Both countries are top importers of metals. Hence, any economic problems in these two counties impact global metal demand.

Along with a slowdown in China, recessionary fears are looming over the US.

Indian steel companies are also under pressure because of low demand from European markets. European steel demand is likely to fall in 2023, which means more headwinds for the Indian metal sector.

Also, it is pertinent to note that the metal sector is a capital-intensive sector. A lot of trade in the metal sector is carried out in credit, resulting in huge exposure to banks.

Post-pandemic central banks over the world have increased their interest rates to control inflation. As a result, the purchasing power of consumers is impacted.

#2 Poor quarterly results

Q3 was a tough quarter for metal companies. Rising input prices, low demand, and falling metal prices induced pressure on the profit margins of the company. Metal prices lowered significantly in 2022 as a result most of the metal companies' profit margins took a hit.

For the quarter ended December 2022, Tata Steel reported total sales of Rs 573.5 billion (bn). Sequentially, sales were down 5% and on a YoY basis, sales were down by 6%.

Similarly, all top metal companies like Hindalco, Nalco, Hindustan Zinc, SAIL, Vedanta, etc reported poor quarterly results.

#3 Strengthening dollar index

When it comes to international trade, the US dollar is the main currency used.

The US dollar index saw a sharp rise post-pandemic. Since commodity prices are inversely correlated with the dollar, when the dollar appreciates, the price of commodities measured in other currencies rises.

Thus as the dollar index moves higher the buying power of consumers reduces.

How the BSE metal index has performed recently

In the past five trading sessions, the BSE metal index fell by 3%. In the past one year, the BSE metal index is down by 11%.

On a YTD basis, the BSE metal index fell by 9%

Performance of metal stocks...

Here's a table showing performance of metal stocks:

Metal Stocks Performance

Company name	Closing as on 17 Mar 2023	YoY Performance	YTD Performance
APL Apollo Tubes Ltd.	284.5	-69.70%	-74.00%
JSW Steel Ltd.	222.6	-66.00%	-71.00%
Coal India Ltd.	83.3	-52.90%	-63.00%
National Aluminium Company Ltd.	88.6	-24.20%	10.10%
Jindal Steel & Power Ltd.	676.2	45.40%	16.50%
Vedanta Ltd.	396.8	6.30%	28.70%
Steel Authority Of India Ltd.	107.1	10.10%	29.70%
Hindustan Zinc Ltd.	572.2	84.60%	77.50%
Hindalco Industries Ltd.	1238.7	116.60%	161.70%
Tata Steel Ltd.	312.2	146.80%	177.10%

Data Source: Ace Equity

Investment Takeaway

The SVB collapse does not pose systematic risks for the US economy. Tanushree Banerjee, co-head of research at Equitymaster, wrote this in her latest editorial on the SVB Crisis,

"... But SVB isn't Lehman and 2023 isn't 2008. We probably aren't looking at a systemic financial crisis in the US or India."

Hence, the US economy will slowly but surely come out of the SVB crisis. However, recessionary pressures continue to loom over investors.

China is also slowly moving out from strict lockdowns. The demand and prices are reviving in China but they are a long way away from returning to the pre pandemic level.

The Indian metal sector faces headwinds currently but its future seems to be bright. Investors should carefully consider investment horizon and goals before making any investment decisions.

Happy Investing!

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Learn more about our recommendation services here...