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Metal stocks slumped on Friday with the BSE Metal Index falling nearly 8% in a week as China stepped up its efforts to control metal prices that have seen a sharp surge since last year.

On the London Metal Exchange, copper, aluminium, and zinc dropped 6%, 2% and 3.1%, respectively, this week, while China hot-rolled steel prices fell 2% in the same period.

Till last week (11 June), the BSE Metal Index was on an upswing, gaining 67.4% year-to-date, but since then it has lost 7.44%. Since 11 June, Jindal Steel and Power Ltd (JSPL) has dropped 8.6%, JSW Steel Ltd has erased 8% of its stock value, Tata Steel has fallen 7.2%, while Steel Authority of India is down 8.4%, and Hindalco Industries Ltd shed 6% of its stock value.

The correction in metal stocks came after China’s National Food and Strategic Reserves Administration said it was releasing government reserves of metals in batches, including copper, aluminium and zinc, in the near future. The reserve stocks of metals will be released through bidding to processing and manufacturing industries.

“This step was taken to cool down the multi-year high commodity prices and boost supply shortage to ensure price stability in the commodity market. At present, metal stocks have slumped on speculation of rising supply from China. However, China has not specified the volumes that will be offloaded from reserves. Thus, the quantum of physical metal release by China to ease the supply-demand gap will be in focus," said Ankit Pareek, research analyst at Choice Broking.

At this stage, it’s difficult to determine what China is holding and how much it wants to release, said Mohit Nigam, head, portfolio management services, Hem Securities. “We don’t expect a severe correction in metal stocks as both domestic and global demand continue to be strong with improved visibility," Nigam said.

Brokerage firm Credit Suisse has downgraded the steel sector after the BSE Metal Index jumped 67% year-to-date (till 11 June) as it sees multiple risks to steel prices ahead.

“(We see multiple risks like) impact of supply chain shock, which drove steel prices to record highs, easing, China entering a weak demand season at a time when production continues to be very strong, the Chinese government’s recent comments on price control of commodities, especially steel and iron ore, and ex-China production run-rate catching up and at only 4% below the pre-covid peak now, while demand is at the pre-covid peak", Credit Suisse said in a 25 May report. “...with steel names trading at a decadal high relative price-to-book and the near-term risks to steel prices, we advise caution and to book profits as well," the report said.

The brokerage firm has downgraded Tata Steel and JSPL to neutral from outperform. It also downgraded JSW Steel to underperform from neutral.

The recent developments on the metals front could prove to be a headwind for the listing of the recent initial public offering (IPO) of steel producer Shyam Metalics, which is expected to debut on stock exchanges on 24 June. The IPO was a bumper hit, witnessing subscription of more than 121 times.

The grey market premium was quoting at 130 a share, according to a dealer, dropping from a peak of 155-160 apiece.

“We believe strong demand, led by infrastructure development and steady pricing scenario in the sector, will keep listing gains in Shyam Metalics IPO intact," Nigam said.

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