InvestorQ : Why is the Metals index down so sharply in the stock markets in last few weeks?
Chandralekha Desai made post

Why is the Metals index down so sharply in the stock markets in last few weeks?

NISHA Nayak answered.
8 months ago

Ever since the risk of an economic slowdown was first flagged by the Fed, the shares of metal companies have reeled under pressure. The slowdown in China caused by the stringent COVID restrictions have only worsened the situation. In fact, the S&P BSE Metal index hit a 15-month low recently. Tata Steel, Hindalco, NMDC and Vedanta are all down more than 35% from their peal prices. Even on Monday 20th June, the BSE Metals Index was among the top losers in the stock market.

What exactly is hitting the metal stocks so hard? For starters, it is the increased risks of a global growth slowdown amidst fears of a recession which would lead to tepid demand for metals. Also, the persistently higher inflation has acted as a major setback to the demand outlook for these metals. Two factors viz. the Fed aggression in hiking rates and the potential Chinese slowdown due to the COVID restrictions are spooking the metal companies beyond a point.

There is also the fear that as the virus resurfaces, more countries could reimpose mobility restrictions. This is being aggravated by the spike in energy prices and supply disruptions resulting broad-based inflation. Incidentally, the recent metal crash has it the emerging markets much harder than the developed markets. The Chinese realty sector is also laying off people aggressively while the ongoing tension between Russia and Ukraine have limited the growth prospects of a number of commodity driven industries.

The numbers present a fairly steep impact on growth, as per early estimates. Global growth has bene lowered from 6.1% in 2021 to 3.6% in 2022. This is nearly 80 bps lower than the previous estimated made by the World Economic Outlook presented by the World Bank in January 2022. The largest economy, the United States, is likely to take the biggest hit in absolute terms. Also, the full impact on the EU as an outcome of the ongoing war in Ukraine would only be known in the next few months and it is likely to be a steep impact.

In fact, the World Steel Association has projected the steel demand to increase by juts about 40 bps globally. However, the demand in the rich EU region is expected to fall by -1.3%. The Indian government had recently imposed export duty on iron ore, pellets, and certain categories of steel which are also depressing prices of metals. However, with the coking coal prices still quite high, the operating margins are likely to remain under pressure for the metal companies.