Metal stocks feel the heat of conflicting trends across commodity markets

Analysts are now taking note of a few developments that could lead to demand reduction; Nifty Metals Index, with 2.85% fall on Monday was the top loser among sectoral indices

The last week has seen corrections across the metals and minerals space. This has resulted in corrections in the share prices of most metal companies, across iron and steel, zinc, aluminium, copper, seeing corrections and ore companies like NMDC also seeing sell offs.

There are conflicting trends for industrials across commodity markets. The Ukraine War has set off supply disruptions since Russia (which will continue to be under sanction) and Ukraine (which is a devastated war-zone) are both players. That led to sharp uptrends in prices.

However, commodity analysts are now taking note of a few developments that could lead to demand reduction. Global GDP growth is being downgraded and will be downgraded again, if the conflict continues. The world’s biggest consumer / producer China, appears headed into serious lockdowns. This means demand reduction for sure, but there will be supply reduction as well.

Given China’s emphasis on carbon reduction, it’s likely China will reduce metals production, retiring smelters and steel mills over the long-term. It’s hard to estimate likely changes in the supply-demand equations in such a volatile situation. Demand will fall but so will supply. If supply exceeds demand, prices will fall. Vice-versa, metals prices will stay high.

Another important trend is rising costs for metal producers. Apart from supply chain issues, fuel costs have gone sky high. Russia/ Ukraine is a key source for high-grade coals as well as crude and gas. All metals production is power-intensive so raw material supply disruptions and higher fuel costs will mean that production costs rise. This could lead to thinner margins and lower realisations.

In the Indian context, domestic demand will be largely driven by the government policy focus on infrastructure development and the associated construction. Private sector investments in real estate development are likely to be K-shaped in 2022-23. While high-end real estate demand is there, lower-income and rural demand may be soft.

Guidance at the moment suggests that aluminium and steel will find markets in the EU, replacing lost Russia/ Ukraine exports. Zinc is expected to stay flat in terms of volumes. Prices may be supported for a while due to fears of supply disruptions, with consumers trying to build inventory, or lock in supplies. If global GDP growth slows down more than currently anticipated, that could lead to deep price corrections across the metals space.

On the LME Aluminium prices have declined 20 per cent since early March. Copper prices are down 9 per cent and so is tin. Steel prices have been more or less flat. Among other industrial metals, Zinc is trading high. So is Lithium. Both are driven by supply disruptions out of China. Nickel has seen wild fluctuations in price, moving up 60 per cent (Russia being a big producer) and then falling by 30 per cent.

The Nifty Metals Index is down 2.2 per cent in the last month after dropping nearly 3 per cent on Monday. Given the fall in global aluminium and copper prices, it’s not surprising that Hindalco and National Aluminium have both lost over 10 per cent in the last month while Tata Steel and Sail have also lost over 5 per cent.