“Every once in a while, the market does something so stupid it takes your breath away.”
– Jim Cramer (Mad Money)
Metals underlie many of the fundamental roles of contemporary society, such as housing, transportation and communication, in the form of in-use stocks. More and more such resources are extracted from subsurface mineral reserves and converted into build-up components which give us particular infrastructure like buildings and other consumer products everyday.
As a product, metal is evidently very influential in the market and easily spells huge profits for anybody who is involved in its business. So it's safe to say that it's stocks hold somewhat of a celebrity status in the stock market, and can seriously affect a lot of pockets (investors and entities included), if they start acting up. These days this elite portion of the stock market seems to have scraped its knees pretty badly, forcing the Nifty FMCG and all other sectoral indices to close in the red very frequently. This article will analyse just how bad the problem is, why has it happened and what does the future hold in this context?
The ‘What’ and ‘Why’ of the falling metal stocks
The past 2 years have been nothing, but a series of dramatic ups and downs for the metal market. The first major injury of the year was witnessed on 10 May 2020, when the BSE Metal Index corrected 10%, it sank by 7%. Coal India, Vedanta, JSW Steel and SAIL were very much the biggest losses, each falling by over 8%. The BSE Metal Index was up until 11 June, but suddenly it dropped 7.4%.
Following the 8.6 percent fall in Jindal Steel and Power on 11 June 2020, JSW Steel eliminated 8 percent of their inventory. Tata Steel also decreased by 7.2%, while SAIL decreased by 8.4%, with Hindalco Industries dropping 6% of its inventory value. Copper, aluminium and zinc on the London Metal Exchange decreased 6%, 2% and 3,1%, respectively. In the same period, China's hot-rolled steel prices declined by 2%.
While the downs after that were mostly harmless, the most recent one which happened in August 2021, was what raised concerns towards the falling stock. In this period, 107.97 points or 0.19% of the S&P BSE Sensex index was lost, and 78.60 points or 0.48% of the 50 scrip gauge. In the past week of August, this 30-strong pack came to a close of 789.25 or 1.41 percent. Wider clues have fallen 1.72 percent and 3.42 percent correspondingly with the headline indicators of Nifty Midcap 100 and Smallcap 100.
The most catastrophic effect was among the industry indicators from the NSEs: Nifty Metal, Media, PSU Bank and Realty indexes with weekly losses of 7.99%, 5.96%, 5.85% and 5.36%. The FMCG and IT barometers, respectively, increased 4.76% and 2.06%. During the last week of August, the Nifty Bank index dropped 1.135.50 points (3.14%).
It has been speculated that the metal markets are under pressure because of expectations that the US Federal Reserve could probably begin to reduce huge stimuli. This could have been one of the reasons why metal prices rose in the last year. Moreover, Edelweiss analysts believe that America’s interest rate growth, taper tantrum, and inflation fears are important macro threats to the metal and mining industries. Based on the records of the US Federal Reserve, the central bank officials expect to scale down the rates of acquisition of bonds by the end of this year, taking into account improvements in inflation and employment. Moreover, with the rapid emergence of delta coronavirus variants, economic growth hazards have increased.
In addition to that, China's political uncertainty remains a crucial issue as the recent inconsistent declarations on cuts in output have confused the street. Policies cannot be perceived as changing or implementing overnight. Furthermore, uncertainty might be seen as hurdles rather than as bottlenecks and a way to remain hopeful about China's long-term objective of reducing its carbon impact.
What can be expected, moving forward ?
Now that we enter the second phase of the crisis, markets will be much more demarcating. Companies that can show growth in profits will yield positive net returns, but the same cannot be stated for those that have recorded lower revenues. One should see how changes are taking place worldwide, in terms of increased bond rates and flows in different good sectors. One doesn't have to be quick to buy in this market or wait and watch for three to four months.
Demands have been shown to recover very swiftly worldwide and this tendency will continue because the economic recovery is quite unstable, as we observe the second wave and the third wave of the Delta variants produced in different nations. The government and central banks will therefore have a very careful approach to reverse any form of economic stimulus. The demand outlook is therefore quite solid.
Metals appear to rebound from a three-year perspective, meaning that there will be uncertainty for the next couple of months. As easy liquidity goes away, you can see a correction in metal prices. These stocks were highly successful. In the last nine months, they were 3-4 baggers. In the short term, the industry is sensitive to a certain amount of profit. The post-20% correction will prove beneficial because in the next three to six months 10-20% can be easily corrected. All in all the market will recover from this slump to register profits for the investors. The good news is it will do so on its own and the market wouldn't have to be coerced into creating induced profits for it.
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Written by Shubhi Pandey (shubhi221199@gmail.com)
Edited by Mehak Vohra