The Hindu Business Line : Fall in LME prices hits metal stocks

Advertisement

Mumbai Feb. 5 Metal stocks plunged on the bourses following the fall in prices on the London Metal Exchange (LME) on Friday. Base metal prices dropped on LME on reports that a $1-billion hedge fund, Red Kite, trading in metals, has lost 20 per cent of its assets in January. The BSE Metal index closed down 111.15 points or 1.18 per cent at 9,345.74 points today.

Analysts termed the fall in stock prices as `sentimental reaction' to the hedge fund's loss. They also said the fall was exaggerated as metal stocks had already peaked and were due for a correction.

Hindustan Zinc fell 5.52 per cent at Rs 655.05, Hindalco ended lower 2.73 per cent at Rs 178, while Nalco closed at Rs 234.8, down 0.91 per cent on the BSE on Monday.

Investors fear metal prices on the LME could continue to decline, said analysts.

"Domestic prices of zinc and other base metals mirror the LME prices. If there is a fall in metal prices on LME, domestic prices of base metals cannot trade any higher. Zinc prices fell more than 9 per cent on Friday, and other base metal prices could follow suit. Almost 20 per cent of the Red Kite hedge fund was wiped out in the beginning of the year. There are concerns that if the fund faces redemption pressure, it would have to liquidate its position, which might lead to a further fall in base metal prices," said Mr Vishal Chandak, metal analyst, Emkay Shares and Stock Brokers.

The loss made by Red Kite only helped the drop in metal stocks (on the BSE and the NSE), which were trading at near one-year forward valuations, said analysts.

"Most metals were already trading at the peak of their cycle and investors were unlikely to make any further money in these stocks. There is a demand surplus for most metals and no addition to capacities is expected suggesting negligible future growth for companies. Thus, it would be better to sell metal stocks now, and buy later at lower prices," said Mr Kshitij Prasad, metal analyst, Anand Rathi.

Mr Hitesh Agrawal, metal analyst, Angel Broking, said there were two reasons for the metal prices to fall further: the hedge funds wanting to square off their positions further and consistent inventory build up in copper on the LME.

Analysts said even in case the prices of base metals go up immediately, they will pull back in the future. Most analysts are bearish on copper in the short medium-term.

More Stories on : Stock Markets | Stocks | Metals

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page