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With a new day, comes another fall in metal stocks. Industrial metal prices are trading at multi-month lows.

The BSE Metal index slipped 5.6% earlier this week on 10 May 2022 and is down 20.6% in the past month.

The index fell yet again on Wednesday before recovering at the end. Yesterday, the BSE metal index was the top loser and fell over 3%!

Sharp declines in the underlying commodity and metal stocks have become a routine after the BSE metal index reached an all-time high of 23,743 on 11 April 2022.

Wondering what's dragging the index lower?

Let's look at a few reasons...

#1 The economic slowdown in China

China is the biggest consumer as well as supplier of industrial metals around the globe. As per official data, sweeping Covid-19 lockdowns have taken a toll on the country's growth.

Copper imports have fallen by 4% year-on-year (YoY) in April owing to dampened demand since production is not in full swing.

Retail sales fell 3.5% in March compared with the previous year as the authorities introduced strict new anti-virus controls.

Shanghai, the country's financial hub, has been largely sealed off for weeks.Tesla recently reported that it might have to halt production in its Shanghai plant which was already being operated well below capacity.

The company is facing challenges getting production lines back up to speed while keeping workers on-site in a "closed-loop" system. Even if they manage to get everything right, such firms depend on suppliers facing similar challenges causing lack of raw materials.

#2 Strengthening of the Dollar Index

When it comes to international trade for raw materials, theUS dollaris the exchange mechanism in many if not most cases.

When the value of the dollar rises, it costs fewer dollars to buy commodities. At the same time, it costs a greater amount of other currencies for trading in commodities when the dollar is moving higher.

Another reason for the influence of the dollar is that commodities are global assets. They trade all over the world. Buyers purchase commodities such as corn, soybeans, wheat, and oil with dollars.

When the value of the dollar rises, these currencies have lower buying power, because it requires higher amounts of their currencies to purchase each dollar. Thus, causing a negative impact on the demand.

#3 Supply exceeds demand

Classic economics teaches that prices fall when supply exceeds demand.

The international copper study group recently revised the usage growth of refined copper down to 1.9%, indicating surplus in the global markets for next two years.

This was due to a weaker global economic outlook mainly as a consequence of the Russia-Ukraine situation and the negative effect Covid-19 related lockdowns in China.

The finance minister of Chile, the largest copper producing country in the world, recently stated that global growth would be slow whereas domestic demand is also weak.

According to a report by rating agency CRISIL, steel prices, which have been on a song for the past two years, are finally set to correct on weak seasonality. Steel may trade at around 60,000/tonne by the end of fiscal year 2022, down from the 76,000/tonne peak in April.

Performance of metal stocks...

Here's a table showing performance of metal stocks:

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View Full Image

In conclusion...

Prices are still holding high because of the continuing uncertainty over supply disruptions, decarbonisation measures globally, especially in China, and geopolitical risks from the Russia-Ukraine war, which has driven up raw material costs.

But according to experts, the sharp correction in metals will continue till May expiry.

While this consolidation negatively impacts metal stocks, it can help companies affected by high raw material costs revive their operating margins.

The auto sector and realty sector are set to gain the most from this correction.

However, the global markets are quite volatile to predict the extent of corrections in metals.

Since we're discussing metal stocks, check out the below video where India's #1 trader Vijay Bhambwani explains whether the bull market in metals is over.

Happy Investing!

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such.

This article is syndicated from Equitymaster.com

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