Mumbai: Metal stocks slumped on Friday amid a collapse in iron ore futures worldwide amid expectations of slowing demand from China and an increasing likelihood of a Fed tightening. Comments from mining leader BHP that the prospect of much lower steel production in the second half of the year will test the optimistic resolve of the futures markets further deterred investors.
Iron ore prices, which hit record highs in May, plunged to their largest monthly loss since decarbonization in China, including limiting steel production, hurting demand for the raw material used to make it, analysts said.
The Nifty Metal index plunged 6.43% on Friday, its largest daily decline in the past 15 months. The Nifty lost 0.71%. Stocks like NMDC,
, and were each down 9%, while Jindal Steel and Power, SAIL, JSW Steel were each down 6%.
The SGX August futures contract for 62% iron ore fines is down more than 15% so far in August, and 30% from its record high of $ 215 per tonne on May 12 this year.
“Metal inventories fell for a number of reasons, such as the Fed’s taper plans, the correction in commodity prices, the crackdown on regulators in China and the BHP warning of Chinese steel production cuts,” said Gaurav Dua, Sharekhan. “That doesn’t mean the history of metal stocks is over, however. Even with the current metal prices, the Indian metal groups can make super profits. ”
The Chinese steel industry has pledged to cut production significantly, but to achieve that goal, huge cutbacks will be required in the second half of the year to offset booming production in early 2021. Production in July was more than 8% lower than a year earlier, data from Monday showed.
Broking analyst Yash Sawant said recent delta outbreaks and severe flooding in China threatened to slow the pace of a broader recovery, clouding the industrial metal demand outlook.
Iron ore closed 12% in Singapore on Thursday, its lowest level since December. It is the most heavily China-focused commodity and the first victim of a global shift in sentiment. This slump is spreading to steel prices.
Copper also fell to a four-month low on Thursday as investors worried about Chinese steel production. China has repeatedly urged its steel mills to cut production, in part to reduce pollution. Some large steelmakers are already taking precautions to reduce supply, which is driving prices up.
However, according to analysts, Indian companies are in much better shape with the ongoing balance sheet revision, which leaves scope for improved profits and margins.
“The ongoing balance sheet repair has been completely ignored by the street,” said Amit Dixit, an analyst at Edelweiss Securities. “For the first time we are experiencing a scenario in which, despite increasing capital expenditures from FY22, iron companies will be in much better shape up to FY25 due to higher capacities but lower net debt.”