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Business News/ Market / Mark-to-market/  When China sneezes, metals catch a cold
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When China sneezes, metals catch a cold

Beijing's clumsy handling of the situation in Chinese equities appears to have caused panic that is spreading to other assets

Falling iron-ore prices are likely to keep up the pressure on falling steel prices. Photo: Aniruddha Chowdhury/MintPremium
Falling iron-ore prices are likely to keep up the pressure on falling steel prices. Photo: Aniruddha Chowdhury/Mint

A sharp fall in Indian metal shares on Wednesday—the S&P BSE Metal Index was down 3.9%—raises fears of more trouble ahead. The fall follows plummeting global metal prices, which, in turn, is a reaction to the meltdown in Chinese equities. What’s the connection? Beijing’s clumsy handling of the situation in Chinese equities appears to have caused panic that is spreading to other assets. There’s also a worry that falling stocks could have knock-on effects on the Chinese economy.

How far this can go is anybody’s guess. If the panic is really a symptom of some underlying rot, then it could turn worse. For now, base metals are at their lowest level in 2015 and could hit newer lows. Here’s a look at some key commodities that matter for locally listed metal companies.

Iron ore and steel: Iron ore futures are down 8% in China on Wednesday, reported the Financial Times. The steel-making raw material had earlier recovered from its lows of April, partly attributed to bad weather affecting supply. But supply has improved and growing stockpiles at Chinese ports caused prices to fall. The Chinese situation has added to the worry and prices have now gone below the April lows.

Falling iron-ore prices are likely to keep up the pressure on falling steel prices. That’s bad news for both iron-ore mining companies such as NMDC Ltd and steel firms such as Tata Steel Ltd, JSW Steel Ltd and Steel Authority of India Ltd. Even in the June quarter, their performance is expected to be affected by a decline in realization. If there is one bright spot, it is that demand appears to have picked up.

Base metals: Since June, as of Tuesday, copper prices on the London Metal Exchange are down 11.4%, zinc is down 10.4% and aluminium by 5.8%. That is a sharp correction in a small period. Metal premiums, too, are believed to have declined, especially in aluminium. That implies realizations could decline even further. Companies have seen costs increase due to higher royalty and provisions for mining-related levies. This is likely to affect their performance in the coming quarters. Vedanta Ltd earns revenue from crude oil, non-ferrous metals and, to a smaller extent, iron ore, making it vulnerable on several fronts. Hindalco Industries Ltd could suffer from declining aluminium realizations.

Is the situation dire? Not immediately. The current slide could be more a result of panic than any new problems in the Chinese economy. If the panic subsides, then prices could recover. Also, falling prices could see miners temporarily shut unviable operations. If sufficient capacity is taken off the market, that could spark a price recovery. A satisfactory resolution to the Greek crisis could boost sentiment. In the domestic market, a recovery in demand, both investment-led and consumption-led, can spur demand for metals. For the moment though, China holds all the answers. Domestic buyers of raw materials may be happy as their costs decline, but so far, low inflation has not solved a bigger problem—weak consumption demand.

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Published: 08 Jul 2015, 08:07 PM IST
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