Metal stocks melt on domestic slowdown, global economic woes

Suresh P Iyengar Mumbai | Updated on August 23, 2019 Published on August 23, 2019

Avoid bottom-fishing as trade war may prolong, caution analysts

Metal stocks have been caught in the whirlwind of the economic down-cycle, both in the domestic and global markets, with most of them trading close to their 52-week lows.

Even after the knock-down effect, most analysts are cautioning investors from bottom-fishing as they expect the trade war between the US and China to continue for some time and economic uncertainty to cloud this sector in the coming days. The BSE Metal index has plunged by 3,027 points to 8,486 on Friday from 11,513 logged in April. The impact on individual stocks constituting the index has been worse.

For instance, Tata Steel touched a new 52-week low of ₹330 on Friday, though it clawed up to close at ₹335 as a few braveheart investors ventured to buy the stock at rock bottom.

In fact, stocks of leading metal and mining companies such as Hindustan Zinc, Nalco, NMDC and SAIL hit new 52-week lows on Friday at ₹193, ₹37, ₹75 and ₹29, respectively. JSW Steel and Hindalco, which closed at ₹221 and ₹181, respectively, hit their 52-week lows of ₹206 and ₹172, respectively, early this month.

Atish Matlawala, Senior Analyst, SSJ Finance & Securities, said India became a net importer of steel after remaining s net exporter for two consecutive years till last fiscal. And, currently, imports are continuing unabated.

Most of the imports into the country are duty-free from South-East Asian countries which have signed free trade agreements with India. Whereas India’s exports to the European Union have declined after a string of safeguard measures imposed by the EU, he said.

Trimming investment plans

Interestingly most of the Indian metal companies had drawn up huge investment plans to enhance capacity, but are now trimming these down.

Tata Steel, which is facing the double-whammy of a slowing economy and struggling financials of its European subsidiaries, has cut capex by over 33 per cent to ₹8,000 crore this fiscal, against the earlier estimate of ₹12,000 crore. Bogged down by rising inventory, JSW Steel is resorting to production cuts before taking a call on its investments.

To make matters worse, Matlawala said the Directorate General of Trade Remedies had recently rejected the Indian Steel Association’s petition for a 25 per cent safeguard duty on import of various steel products, which has resulted in demand-supply mismatch in the domestic market, keeping steel prices under pressure. “We believe there will be more pain in the sector going ahead and hence, recommend investors to avoid the sector in the current scenario,” he said.

Published on August 23, 2019
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