Markets need tourniquet fix: Metal stocks melt down amid fears of recession

BSE Metal Index now down 35% from 2022 highs

Metal stocks plunged on Monday amid global sell-off in commodities due to fears of global recession and uncertain demand outlook from China.

The S&P BSE Metal Index, a gauge for the performance of stocks in the metals and mining sector, dropped more than 6 per cent before recouping some losses to end at 15,218 - the lowest close since April 2021 — down 4.5 per cent over the previous day’s close.

The BSE Metal Index was by far the worst-performing among the 19 sectoral gauges of the BSE.

Index heavyweights like Tata Steel and Hindalco Industries finished 5 per cent lower, while Vedanta plunged 13 per cent.

Investors dumped metal stocks for fear that persistently higher inflation could prove to be a major blow to demand outlook. A slump in iron ore and other steel-making raw material prices globally amid uncertain China outlook was seen as the latest trigger for the sell-off in metal stocks.

Metal stocks have already been blindsided since the government’s decision to impose export duty on steel to simmer down domestic prices. The move led to sharp rerating in stocks as analysts drastically cut earnings growth estimates for 2022-23.

From this year’s high, the metal index is now down over 35 per cent. Whereas individual stocks such as Tata Steel, Hindalco Industries, Jindal Steel & Power, NMDC, and Vedanta have shed up to 35 per cent in the past one month.

"Domestic steel prices have crashed nearly 20 per cent recently from the peak, following supply glut in the market caused by the imposition of 15 per cent export duty. Unless this decision is reversed, steel exports are likely to take a hit of nearly 35 per cent. This will also pummel the profitability of the steel sector and get reflected in the prices of steel stocks that have taken a wallop. The positive side is that steel consumers, notably in the automotive and construction sectors, will gain from this steep decline in prices,” said V K Vijayakumar, chief investment strategist, Geojit Financial Services.

Analysts expect margins of metal producers to come under pressure over the next two quarters as the benefit of lower input costs occurs with a lag.

“Demand and consequently pricing is seasonally weak at present. The government’s policy of imposition of export duty on iron ore, pellets, and certain categories of steel will further depress domestic prices. Unless there is meaningful correction in coking coal prices, margin can remain subdued in the next six months,” observed analysts at Motilal Oswal Financial Services.

The aggressive stance of the US Federal Reserve has sparked fears of recession, which is cascading to markets, including commodities, across the globe. Further, the ongoing retrenchment of China's real estate sector and slower-than-expected recovery of private consumption and the ongoing tension between Russia and Ukraine have limited growth prospects.