Why Metal Stocks Are Under Pressure?

This year's most successful trade 'long metal stocks' seems to be unravelling amid a selloff in global commodity prices.

The BSE Metal Index tanked 7% this week, the biggest setback since the week ended 10 May 2020 when the index had corrected 10%.

Coal India, Vedanta, JSW Steel, and SAIL have been the biggest losers declining more than 8% each. The fall, however, comes after a sharp up move this year.

Till last week (11 June), the BSE Metal Index was on an upswing, gaining 67.4% year-to-date, but since then it has lost 7.4%.

Since 11 June, Jindal Steel and Power has dropped 8.6%, JSW Steel has erased 8% of its stock value.

Also Tata Steel has fallen 7.2%, while SAIL is down 8.4%, and Hindalco Industries shed 6% of its stock value.

On the London Metal Exchange, copper, aluminium, and zinc dropped 6%, 2%, and 3.1%, respectively, this week, while China hot-rolled steel prices fell 2% in the same period.

What led to the sudden correction in metal stocks?

The boom in industrial metals has run into a roadblock that is hard to assess.

As activity resumes across the globe, the demand for steel, copper, zinc, aluminium, tin, etc, has shot up.

Since supply chains have also been disrupted, this led to a big rise in prices.

Also, the correction in metal stocks came after China's National Food and Strategic Reserves Administration said it was releasing government reserves of metals in batches, including copper, aluminium, and zinc, in the near future.

This is China's effort to curb strong rally in commodities price after the domestic producers factory gate prices shot to their fastest annual pace in more than 12 years - indicating global inflation pressures.

The reserve stocks of metals will be released through bidding to processing and manufacturing industries.

Apart from that, commodities prices especially non-ferrous base metal are headed for their worst week since March 2021 after China decides to sell reserves.

Also, a strong dollar coupled with a hawkish stance and interest rate hikes outlook by the US Federal Reserve - led to dampening sentiments further in the sector.

Overall, weak Indian markets benchmark also tamed the performance.

Global firm downgrades the steel sector

Global brokerage firm Credit Suisse has downgraded the steel sector after the BSE Metal Index jumped 67% year-to-date (till 11 June) as it sees multiple risks to steel prices ahead.

In a report, Credit Suisse said,

• We see multiple risks like impact of supply chain shock, which drove steel prices to record highs, easing, China entering a weak demand season at a time when production continues to be very strong, the Chinese government's recent comments on price control of commodities, especially steel and iron ore, and ex-China production run-rate catching up and at only 4% below the pre-covid peak now, while demand is at the pre-covid peak.

The brokerage firm has downgraded Tata Steel and Jindal steel to neutral from outperform. It also downgraded JSW Steel to underperform from neutral.

Current downtrend to affect the latest developments in the metal sector

The recent developments on the metals front could prove to be a headwind for the listing of the recent initial public offering (IPO) of steel producer Shyam Metalics, which is expected to debut on stock exchanges on 24 June.

The IPO was a bumper hit, witnessing subscription of more than 121 times.

Yesterday, the grey market premium was quoting at Rs 130 a share, according to a dealer, dropping from a peak of Rs 155-160 apiece.

How the stock markets reacted to Nifty Metal Index yesterday

Nifty Metal Index was near its 5,000-level mark on Friday and was under steep selling pressure with the majority of stocks in the red as China stepped up its efforts to control metal prices that have seen a sharp surge since last year.

Yesterday, Nifty metal index closed at 5,048.7 lower by 46.5 points or 0.9%.

The index touched an intraday high and low of 5,098.9 and 4,858.8 respectively.

Earlier this month, the index had touched a new all-time high of 5,524.3, however, has now scrapped its record levels and entered into a bearish trend.

On the index, Adani Enterprises, Ratnamani ended the day up 9.3% and 0.9%, respectively.

Shares of Hindalco, MOIL closed higher by 0.9% and 0.7%, respectively.

The remaining all stocks were on a downside move on the metal index.

SAIL was the top underperformer tumbling 3.7% followed by Vedanta and Coal India slipping by 3.6% and 3.4%, respectively.

JSW Steel dipped by 3.3% and Welspun Corp plunged by 1.9%.

Here's a list of metal stocks and their performance...

		Returns
SCRIP	BSE PRICE(Rs)	1 week	1 month	1 year
COAL INDIA	146.6	-8.0%	-1.1%	13.2%
HINDALCO	371.7	-5.9%	-5.4%	151.1%
HINDUSTAN ZINC	328.8	-3.2%	4.1%	88.9%
JINDAL STEEL & POWER	388.4	-8.6%	-11.0%	177.4%
JSW STEEL	671	-7.9%	-6.0%	249.6%
NALCO	67.6	-5.8%	-11.1%	129.5%
NMDC	178.2	-4.1%	-4.5%	108.4%
SAIL	124	-9.7%	-5.0%	330.6%
TATA STEEL	1,091.3	-6.3%	-5.2%	254.0%
VEDANTA	251.9	-8.0%	-9.7%	146.7%

Source: Equitymaster

The table shows that most of the metal stocks have gained more than 100% in the past one year, apart from Hindustan Zinc and Coal India.

However, in the past one month and one week, metal stocks have witnessed a downward trend in the Indian share markets.

Equitymaster on the commodity supercycle

Here's what Aditya Vora, financial writer at Equitymaster, wrote about the commodity supercycle in the Profit Hunter.

• Steel factories were also shut completely in many countries. After the reopening, it took time for these factories to ramp up production.
  
  Also, the issue of availability of iron ore and the rising prices persisted.
  
  The result?
  
  Commodity prices shot up beyond imagination.
  
  However, this global supply and demand mismatch will normalise.
  
  The similar logic can be applied to other commodities too. The rally is largely due to supply constraints. It's not due to a secular and structural global demand recovery.
  
  I believe these prices are not sustainable. The current trend will put pressure on demand going forward.

You can read the entire article here: Commodity Supercycle: What Goes Up Fast Will Come Down Faster

Co-head of Research at Equitymaster, Rahul Shah also did a piece on 'Commodity Supercycle'.

Meanwhile, Brijesh Bhatia, Research Analyst at Fast Profits Report shares how you can profit from the next leg of the metals rally, in one of the video for Fast Profits Daily.

Tune in to the video below to find out more.

For more details about the steel sector, you can have a look at the steel sector report on our website.

You can also compare metal companies with their peers.

SAIL vs Tata Steel

Tata Steel vs JSW Steel

Hindalco vs NALCO

SAIL vs Tata Steel BSL

To know what's moving the Indian stock markets today, check out the most recent share market updates here.

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...