Sensex Opens Flat; Metal Stocks Drag

Mon, 18 Jun 09:30 am

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Asian share markets slipped in the opening trade today as investors digested the escalation in trade tensions between the US and China after both countries announced tariffs last week. Japan's Nikkei 225 declined 0.5% while the Kospi slipped 0.2%. Meanwhile, Wall Street stocks ended lower on Friday.

Back home, India share markets opened the day on a flattish note. The BSE Sensex is trading up by 18 points while the NSE Nifty is trading up by 2 points. The BSE Mid Cap index opened up by 0.2% while BSE Small Cap index opened on a flat note.

Sectoral indices have opened the day on a mixed note with metal stocks and consumer durables stocks witnessing maximum selling pressure. While, energy stocks & IT stocks have opened the day in green. The rupee is trading at 67.97 to the US$.

Pharma stocks opened the day on a mixed note with Aarti Drugs & Orchid Pharma leading the pack of gainers. Dr. Reddy's Laboratories has announced that following the launch of its generic Buprenorphine and Naloxone Sublingual Film in the US, the District Court of New Jersey has received and reviewed an emergency application from the plaintiffs in the current patent litigation for a temporary restraining order and preliminary injunction against Dr. Reddy's.

Pending a hearing and decision on the injunction application, the court has issued a temporary restraining order against Dr. Reddy's with respect to further sales and commercialization of Buprenorphine and Naloxone Sublingual Film within the US.

However, the court order does not include a prohibition on commercial manufacturing of the product. The plaintiffs will be required to post a bond or other security totaling US$18 million to satisfy any losses or damages incurred by Dr. Reddy's during the period of the temporary restraining order.

The court has scheduled an expedited hearing of the preliminary injunction for 28 June, and a ruling is expected soon thereafter. Reportedly, the proceeding only involves one patent, US Patent No. 9,931,305.

Dr. Reddy's remains confident in its legal positions on this patent and believes it will prevail on the issues raised with respect to the application for injunction.

Note that, innovators in the pharmaceutical industry make use of patents largely. They make heavy use of patents whenever they create a new drug. In one of the articles, we have spoken everything that you need to know about patented drugs, its advantages and its implications. Here's a snippet:

• "That's how the innovators in the pharmaceutical industry work. They make heavy use of patents whenever they create a new drug. The patent allows them to recoup the high capital expenditure that goes into the research and development (R&D) of new drugs. Companies that have a patent on a particular product are immune from competition for the duration of the patent."

Notably, a number of patent infringement cases have been filed against leading Indian pharma companies and their counterparts in other countries over the last few years.

opened the day down by 0.8%.

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Moving on to the news from the economy. It is welcome that India has decided to propose US$240 million worth of additional tariffs on a variety of imports from the US, in retaliation against tariffs amounting to the same amount on India's exports of Steel and aluminium to the US.

This is puny, in relation to US exports of over US$1.5 trillion. But it would be noticed, because it occurs alongside retaliatory tariffs on US imports by China, the European Union and the US' North American Free Trade Agreement partners, Canada and Mexico.

China has decided to impose additional tariffs on imports from the US worth US$50 billion. The EU is right now proposing additional tariffs on US imports worth a modest US$4.5 billion. This is in response to the Trump administration's decision to levy 25% duty on imports of steel and of 10% on imports of aluminium.

President Trump imposed these tariffs on national security grounds, making it difficult for countries to challenge them at the World Trade Organisaiton.

In any case, the US has been making the WTO dispute settlement mechanism defunct, by refusing to allow judges to be appointed to the body.

As part of safeguarding the rules-based international trading system against this US attack, India is routing its tariff hikes via the WTO, informing the body and raising a fresh dispute on the metal tariffs.

China is imposing tarffis on products that represent powerful domestic lobbies. It is raising tariffs on pork and soya, among other things. Mexico also had pork in its crosshairs.

The EU has announced bourbon as a target. Farm lobbies and their representatives in Congress would, so goes the hope, put pressure on the Trump administration to change course.

Notably, India's steel industry was just coming out of a rough patch. Demand was picking up. Steel prices were on the rise. Buyers were lining up to pick up stressed assets. With the expected pick up in the investment cycle, the sector was on the upswing. And steel exports were on a roll, as can be seen from the chart below:

Is the Steel Sector's Recovery Under Threat?

However, Donald Trump has now spoiled the party with his plans to impose the above tariffs. India produces a lot of both commodities but internationally, we are not a big player. The US imports only 2.4% of steel and 2% aluminium from India.

But it's not that simple.

With the new US tariffs, major exporters like South Korea will look to sell in other countries. This would lead to a glut and as a result, lower prices across the industry. As Ankit wrote in one of the editions of the Equitymaster Insider...

• If metal producers are deterred from selling their goods in the US, they will come looking for other markets to sell their produce. This is likely to create an 'excess-supply' situation in those markets.
  
  What happens when there's too much supply? Basic economics says that when supply increases more than the growth in demand, prices decline. So, Indian metal producers are likely to be faced with the possibility of lower metal prices. This will impact their revenues and profitability.

You can read the entire article here (requires subscription).

The above development would mean lower revenue and profitability for Indian metal companies as well and threaten the nascent recovery in the industry.

How exactly this trade war will unfold is something to watch out for. We'll keep you updated on all the developments from this space.