Metal index weakens over demand concerns
PremiumAmid high inflation and concerns over global slowdown, demand for metals have been impacted
The Nifty Metal index was the biggest loser among sectoral indices on Monday, falling by nearly 4%, while the Nifty50 index was marginally up.
Vedanta Ltd was the worst performing stock in the metal index, closing nearly 13% lower. The company has invited Expression of Interest for the sale of its smelter and refining complex in Tuticorin. The smelter has been closed since mid-2018 following a government order. “This plant was not contributing anything incremental to the company’s profitability. On a normal day, the development would have cheered investors as it means more cash in the hands of the company. However, significant correction in the prices of underlying commodities dealt with by Vedanta over the last few days and Monday have negatively impacted investor sentiments," said Prashanth K.P, vice-president, Dolat Capital Market Pvt. Ltd.
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Metal stocks are under stress and not without reason. Higher inflation levels and potential deceleration in global growth because of the tightening of the interest rate cycle are weighing heavily on demand. The Indian government’s measures to control inflation, such as export duty levy on steel, has drastically reduced prices. Domestic hot rolled coil prices have declined by 22% from the highs of April to ₹61,400 per tonne as on 15 June, according to SteelMint. “End-user industries for steel, both in the domestic and export markets, remain on the sidelines amid weak economic demand and expectation of a further decline in steel prices," said a Nomura Global Markets Research report.
Globally, too, prices of commodities have fallen. The aluminium price on the London Metal Exchange (LME) is down by more than 36% to $2477.25 per tonne as on 17 June from the April highs.The stringent lockdown in China due to re-emergence of covid cases has weighed more on demand than supply. “CRU estimates Chinese demand (for aluminium) to contract by 8.5% year-on-year in Q2CY22 against production growth of 2.1% year-on-year," said analysts at Kotak Institutional Equities in a report on 17 June. The brokerage has cut earnings and target prices of shares of Hindalco Industries, National Aluminium Co, Vedanta, and Hindustan Zinc primarily because of lower metal prices. While lockdowns are easing in China, the recovery is patchy because of new covid cases. However, China has announced subsidies for the automotive industry. It has also announced other stimulus policies. As such, demand may rebound.
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Prices of zinc and copper as on 17 June have also fallen on the LME by 21.6% and 16.2%, respectively, from the highs of April. Energy costs remain high. Along with lower prices it means lower spreads or less profits. As things stand, the Nifty Metal index has plunged by nearly 18% so far in CY2022.