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Evergrande crisis: Metal index down 6.8% amid fears of lower China demand

Analysts, however, see the fall in iron ore prices a lead indicator and expect steel prices to decline soon

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China | Metal stocks | Evergrande

Krishna Kant  |  Mumbai 

Evergrande Group
Photo: Shutterstock

There was a meltdown in on Monday as a debt crisis at one of China’s biggest property developers, Evergrande, led to a global decline in industrial metals and ore prices.

The BSE Metal index, which tracks the prices of India’s top 10 metal and mining companies, was down 6.8 per cent on Monday, its worst showing in months. In comparison, the Sensex was down 0.9 per cent during the day.

The sell-off in the metal space was led by steel makers and iron ore producers while non-ferrous metal producers escaped with minor losses. Tata Steel was the biggest loser and down 9.5 per cent on Monday. It was followed by Jindal Steel & Power (9.1 per cent); NMDC (7.7 per cent); and JSW Steel (7 per cent).

The Monday sell-off in punched a Rs 57,000-crore hole in the pocket of investors. The 10 stocks in the BSE Metal index ended the day with a combined market capitalisation of Rs 8.85 trillion, down from Rs 9.42 trillion on Friday.

This is a sharp reversal for the metal stocks, which have been some of the biggest gainers of the post-pandemic rally on the bourses. The BSE Metal index is still up nearly 234 per cent since March 2020 against a 98.5 per cent rise in the Sensex in the period.

However, including the fall on Monday, the BSE Metal index is now down 9.2 per cent since the end of July this year (see the adjoining charts).

chart


chart

While the immediate trigger for the sell-off in metal space has been the debt woes of Evergrande, biggest property developer, most analysts expect more correction in metal prices and in the coming weeks.

The debt default by is expected to cause a financial contagion in the Chinese real estate and the construction sector, leading to more defaults and a big correction in property prices in mainland This will lead to a sharp decline in construction activities and new property launches in China, adversely affecting the global demand for steel and other construction materials.

“Lead indicators of Chinese demand for steel continue to worsen. Weak real estate data as well as contagion fears on account of debt defaults in the high-yield developer market, sets a context for the current steel production cuts,” write Abhijit Mitra & Mohit Lohia of ICICI Securities.

According to analysts, real estate accounts for nearly 40 per cent of all steel consumption in and the Chinese economy consumes 55-60 per cent of global steel production.

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“While is the 800-pound Gorilla in the market right now, there has been a string of bankruptcy trials behind this. Combining the 10 names that are facing significant stress, the liabilities exposed to default are over $500 billion, including payments to suppliers and employees. The whole ecosystem is on the brink, which is a massive risk to the bulk metals complex,” said Dhananjay Sinha, managing director and chief strategist, JM Finance Institutional Equity.

A decline in metal demand in China will result in a sharp drop in metal prices especially steel and iron ore, adversely affecting the revenues and profitability of steel makers, including Indian

Analysts point out a sharp rise in the margins and profitability of steel makers in the last two quarters was largely driven by higher price realisation rather than volume growth. They now expect the price gains to reverse.

For example, analysts at ICICI Securities expect a sequential decline in the margins and profitability for steel makers in the forthcoming quarters, especially Steel Authority of India (SAIL) and Jindal Steel & Power.

The iron ore market has reacted first and the ore prices in China are down 23 per cent during the month of September so far. In comparison, HR steel prices in China have been stable and are up 0.8 per cent in the month and have declined by just 1.5 per cent in the last week. Similarly, the London Metal index, which tracks the prices of non-ferrous metals, has corrected by 0.74 per cent during the month so far.

Analysts, however, see the fall in iron ore prices a lead indicator and expect steel prices to decline soon. “A decline in iron ore prices has always been a precursor to a correction in steel prices,” said Sinha.

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First Published: Tue, September 21 2021. 00:49 IST
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