Metal stocks fall the most after China's liquidity tightening

In the past week, the Bombay Stock Exchange’s metal index lost seven per cent to 16,303, while the benchmark Sensex lost 2.3 per cent to 16,987.

“There is belief that the Chinese economy is overheating, and that is creating volatility in the commodity market,” said Pankaj Pandey, an analyst with ICICI Direct, a retail broking arm of ICICI Securities. Last week, the Chinese government banned a third mortgage by individuals to rein in the escalating prices of real estate. This is going to affect the demand for houses and, in turn, for metals such as steel and aluminium.

China also announced a 50-basis points increase in banks’ reserve ratio. Which is an indication of a coming interest rate hike and possible withdrawal of government stimulus packages which had boosted infrastructure growth and, in turn, demand for metals.

Sterlite Industries, India’s largest copper producer, lost nine per cent to Rs 739.9 in the past week, while Hindalco, the largest aluminium producer, lost eight per cent to Rs 164.2. China had recently driven the rally in the prices of these metals, due to the building of its inventory, and any slowing in such consumption would have a negative impact on these prices.

Even the largest zinc producer, Hindustan Zinc, lost 6.5 per cent to Rs 1,130 in the past week.

Abroad, too
“Non-ferrous metal prices had rallied earlier on the back of loose monetary policy and low interest rates globally,” said Chirag Shah, an analyst with IDFC-SSKI Securities, a Mumbai-based brokerage. “The inventory situation was anyway a concern. Now, with the tightening in China and potential rollback of stimulus packages globally, metal prices are correcting.” Stocks of steel producers have also lost in the past week. Tata Steel, India’s largest producer, lost 7.8 per cent to Rs 575.8, while the government’s Steel Authority of India Ltd lost three per cent to Rs 211 in the same period.