Metal Stocks Fall on Demand Worries, Fall in Prices; Hindalco, Tata Steel Crash Up To 4%

Indian Metal stocks tumbled as iron ore and steel prices dropped sharply on fears of a slump in demand for commodities. The BSE metal index plunged more than 3 per cent to 15,071. It had settled at 15,612.50 in the previous session. In June, the index lost as much as 13 per cent while it is down 37 per cent from its 52-week high. Metal stocks were down up to 4 per cent in Monday’s trade, making the sector the biggest drag on benchmark indices.

Among the components of the S&P BSE Metal index, JSW Steel Ltd (down 4.95 per cent), Tata Steel Ltd (down 3.01 per cent), Steel Authority of India Ltd (down 2.72 per cent), NMDC Ltd (down 1.91 per cent), Jindal Steel & Power Ltd (down 1.64 per cent), were the top losers. Among the other losers were Hindalco Industries Ltd (down 1.41 per cent), APL Apollo Tubes Ltd (down 0.76 per cent), Coal India Ltd (down 0.71 per cent), Vedanta Ltd (down 0.21 per cent), and National Aluminium Company Ltd (down 0.07 per cent).

Additionally, a gloomy commentary by Jefferies wrecked the risk appetite of investors. It revised its second-half forecast for iron ore to $110 per ton from $115 per ton, pointing at the market surplus, steel production headwinds, and slow Chinese Demand, with policy easing to feed the economy sluggishly.

However, Jefferies said that it’s still early to turn constructive as price to book valuations remain above historical troughs, earnings visibility is poor, and consensus downgrades will continue. The price-to-book ratio compares a company’s market value to its book value.

Metal stocks also witnessed a sell-off on demand worries in top consumer China. China is also the top producer of metals. Mills in China have idled dozens of blast furnaces as stocks piled up after domestic demand weakened, hit by COVID-19 lockdowns and bad weather.

It has slashed estimates on the metal pack, mainly Hindalco, JSW Steel, Tata Steel by 2-34 per cent and believes it is too early to turn constructive, as PB valuations remain above historical troughs, earnings visibility is poor, and consensus downgrades shall.

Nifty Metal fell the most on Monday, compared to all other sectoral indices under the Nifty basket, with Tata Steel, JSW Steel, and SAIL dragging the index the most.

The recent interest rate hike cycle and a downtrend in metal prices have, for the time being, brought down the bullish sentiment on steel stocks and could lead to short-term stock price volatility, stated Mohit Nigam of Hem Securities.

According to Jefferies, the sharp correction in metal prices will likely drive a big margin contraction for Indian metal companies over FY22-24.

It has maintained a Hold rating on domestic stocks Hindalco and Tata Steel, with lower target prices of Rs 310 and Rs 830/share, respectively, while an ‘Underperform’ target on JSW Steel at a target of Rs 405 apiece, a downside of 26.6 per cent compared to its closing price on Monday.