Home >Markets >Mark To Market >Why the Nifty Metals index may find it hard to recover any time soon

Mumbai: Metal prices have been on the downswing and that’s been weighing metal stocks down for some time now.

Demand has been lacklustre from both auto and construction companies. Production cuts at auto companies are not helping; besides, construction demand is off to a slow start due to the seasonal slack in construction activity. As a result, steel prices have dropped in the domestic market.

“On the demand front, existing concerns regarding auto have been exacerbated by the seasonal weakness in construction," said analysts at Edelweiss Securities Ltd in a note to clients.

That’s certainly weighing on the metal index. The Nifty Metals index figures among the worst-performing-sector indices in the past one month. It dipped 5% compared to a 2.33% slip in the Nifty 50.

Cues from the international markets, too, have been weak. Chinese steel prices have fallen below CNY 4000/mt once again. China is also seeing a demand contraction with steel prices turning soft this past month. Besides, China’s stockpiles have been rising with inventories once again cross the 12 million ton mark. This does not bode well for a steel price recovery in the near term.

Besides, steel companies are grappling with rising input costs due to an increase in iron ore prices. This is expected to squeeze operating margins during the first quarter.

“Ahead, we view challenges to profitability for all companies as raw-material costs remain robust primarily due to high iron-ore cost," said the Edelweiss analysts.

Aluminum prices in international markets have slipped 3.02% since April this year. Here the good part is that inventories at the London Metal Exchange have shrunk. That could help keep aluminum prices stable at these levels. Zinc prices have also slipped this financial year, by 18.13%. Copper, lost about 7.95%.

Now, raw material prices have to ease for metal companies to be able to maintain their margins. Critical demand indicators such as a pickup in auto and construction too have to mount a recovery before metal stocks see a rebound. That's not being seen any time soon.

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