Metal stocks shed 3.6% amid Chinese demand worries, the most since April 12

State-owned SAIL and Jindal Steel & Power have lost over 17% each since May 10. Industry leaders Tata Steel, JSW Steel and Hindalco are down over 8% each

The stellar rally in commodity-linked stocks has ground to a halt. The BSE Metal index on Thursday fell 3.6 per cent—the most since April 12. In the previous seven trading sessions, the index has dropped nearly 9 per cent even as the benchmark Sensex is little changed during this period.

The weakness in stock prices comes amid a slump in underlying metal prices due to growing concerns over inflation globally and China's call for tougher oversight of commodity markets and protecting consumers from soaring prices.

High-flying stocks such as state-owned Steel Authority of India (SAIL) and Jindal Steel and Power have crashed over 17 per cent each since May 10. While industry leaders Tata Steel, JSW Steel and Hindalco are down over 8 per cent each. Commodity-linked stocks in Asia such as Australian miner BHP Group, Korean steelmaker Posco and China’s Yanzhou Coal Mining too have seen similar corrections.

Analysts said China's stance has led to higher risk aversion among market participants.

The decline comes weeks after major brokerages forecast a new phase of soaring raw material prices. There are also concerns that central banks will stop the easy money policy, one reason for the rally in commodities.

The minutes of the Federal Reserve meeting in April, which wasreleased on Wednesday, said that a number of officials spoke of adjusting the pace of asset purchases if the economy continues to do well.

The latest correction in the metal pack comes after months of stellar run which lifted the BSE Metal index as much as 75 per cent. Even after Thursday’s fall, the index is still up 60 per cent on a year-to-date basis.

The hope of economic re-openings globally had driven commodity prices prompting some analysts to call it irrational exuberance. The concerns raised by the Chinese government have exacerbated the fall.

"The metal stocks rally happened due to the shift in prices rather than the shift in consumption. Another 10-20 per cent correction looks quite likely. I think this is the beginning of a downward slide, and one should revisit metal stock only after a few years if the fall this time is steep," said G.Chokkalingam, Founder, Equinomics.

China's state broadcaster on Wednesday reported that a state council meeting chaired by Premier Li Keqiang said that commodity supplies should be ensured and should take efforts to prevent rising prices from being passed on to consumers.

Analysts said commodity inflation had pushed China to meaningfully slow credit growth this year. Historically this has been a bad signal for commodity stocks. Experts see this as measures designed to slow construction and capex growth in China, which was one of the main drivers for materials demand.

This week all futures contracts linked to industrial and agricultural staples have seen declines in the global markets.

"Metal space has never been a buy and hold sector. We cannot invest for a long time like other index majors; metal stocks have always been cyclical, bringing enormous risks if you don't book profits on a timely basis. These stocks have risen a lot in the last 18 months, and therefore the valuation is also stretched. One should always buy higher PE metal stocks at the bottom of the commodity cycle and vice versa at the peak of the commodity cycle,' said Chokkalingam.

However, some analysts said that accumulating stocks of big steel players could be a good strategy if their stocks fall further.

"If stocks of big steel players correct another 10-15 per cent, they become attractive. This is the first time we do not have any small steel players. The industry has consolidated due to the bad debts issue. Now we have only five-six big players, and this time these players have repaid debt. And these big players are quite efficient; they can keep prices 10-15 per cent lower than prices in China. But they are not operating at full capacity due to the oxygen crisis, and this will have some impact,” said A K Prabhakar, head of research, IDBI Capital.