When it comes to the stock market, we love mental shortcuts. Take for example, the link investors make between the price of copper and economic growth. Because copper is so widely used across industries, the up or down movement in the copper price tells us whether the global economy is going to boom or crash.
In recent months, copper has fallen sharply, along with other metal prices like aluminium, zinc, and steel. And expectations are that economic growth is slowing. This global slowdown is expected to impact future demand for all metals.
In this week's Analyticks,
- Investors in metal stocks sweat over growth concerns
- Foreign investors continue selling, but are buying in the F&O market
Let’s get into it.
Metal stocks struggle as investors see economic slowdown
Tariffs are notoriously bad at managing a rapidly changing economy. A little over a month ago India, worried about rising costs for infrastructure projects, imposedexport duties on steel.
The Centre couldn’t have predicted the crash in global metal prices that arrived soon after, which hit metal stocks badly and made these export duties an overreaction.
While its arguable that these duties on exports have reduced inflation in India, the demand for steel, aluminium, copper, and other metals is now falling due to concerns of a global recession.
Copperfell to its 16-month low last week. The fear of a fast-moving US Federal Reserve pushing the US into a recession is upending prices across assets and commodities. But despite thepessimism among traders, there is more than one way to look at this churn in metals.
Carmakers have faced acute cost pressures due to steel prices that were rising till recently. Cable makers were also hit by a rise in input costs, especially in metal. Wholesale price inflation reached 15.88% in May, a 30-year high for the WPI. But since its peak, this is how the Nifty Metal index has corrected—
This will certainly impact listedmetals and mining companies, which were expecting the surge in demand in 2021 to last longer. What’s causing the pain?
Valuations are shrinking everywhere
ICICI Securitiessays asset valuations globally are in reset mode. This will not leave metals unscathed, and the fear of a demand slowdown has led the brokerage to downgrade its ratings onTata Steel,Hindalco, andJSW Steel.
This is more bad news after the Centre imposed export duties on steel and iron ore prices, which led to asell-off in metal stocks. Most of these companies’ shares are down 15%-50% down from their year highs.
Kotak Institutional Equities alsodowngraded Tata Steel and JSW Steel to ‘Reduce’. It expects demand slowdown to impact margins at these steel makers.
If these export duties are just a temporary measure to curb rising prices (like in 2008), an eventual rollback could improve the margin outlook for metal stocks.
Metals companies fortunately also have cash in the bank to get through this crisis. In the months before, a commodities boom delivered high profits that helped them reduce their debt, and this keeps them on strong footing to weather the storm.
JSW Steel, Tata Steel, Hindalco andVedanta posted huge profits, with their FY22 net profit seeing at least a 4X rise from FY20. Vedanta swung to a huge Rs 15,000 crore profit in FY21 from a Rs 4,700 crore odd loss in FY20 and rose nearly 58% YoY to Rs 23,709 crore in FY22.
As all metals saw a surge in demand, evenHindustan Zinc posted higher profits, but its growth was not as rapid as other metal miners and product makers.
However, Trendlyne’s Forecaster shows that there might be some slowdown in demand growth going forward. The average revenue estimate in Forecaster’s consensus estimates indicate only JSW Steel seeing steady revenue growth over the next two financial years.
Analysts expect Hindustan Zinc to see a growth in revenue and profit in FY23, according toTrendlyne’s Forecaster estimates. But in FY24, this could taper off.
There are concerns over future demand for metals this year, and this is expected to impact most companies in the listed space. LME aluminium prices are down 36% from its peak seen in April as there is a surplus of aluminium in the market.
Analysts are taking cues from falling copper prices - a price correction in this metal is usually followed by an economic recession, and that’s what the market is pricing in. But a recession in Europe and the US might not be the calamity that it is expected to be, with many predicting a mild recession rather than a serious one.
China’s economy reopening is also a silver lining. China consumes nearly a third of the world’s steel and imports a lot of iron ore. Over the past couple of years, the country has been trying to cut carbon emissions from steel mills at home, and import steel instead. Investors in metal stocks will be hoping that there is a surge in demand for metals, as the Chinese economy comes back to life.
FII/DII flows: FII investors switch from equities to options
This week saw the rupee fall to a new all-time lowagainst the dollar, ending below Rs 79 on Wednesday. This is because foreign investors have been selling Indian shares and other assets. Over the past six months, we have seen a trend of FIIs pulling out cash from equities and putting them mainly in index and stock options. By contrast, domestic mutual funds are pumping cash into equities, as MFs see record SIP flows every month.
In the last month, FIIs pulled out a total of Rs 16,329.9 from the Indian stock market as a whole. They invested Rs 34,106.4 crore into index futures, but sold Rs 46,954.9 crore worth of shares during the same period. Indian mutual funds bought some of these shares foreign investors sold, with a Rs 20.712.9 crore investment.
In the past two weeks, FIIs sold shares worth Rs 21,587.2 crore. Mutual funds bought shares worth Rs 9,119 crore over the same period.
With SIP flows remaining steady, mutual funds may continue their buying despite foreign investors withdrawing in droves. MFs are not making up the shortfall completely, and there is volatility expected ahead for Indian markets.
