Metal companies’ hot run comes to an end as West Asia cools off

The Nifty Metal index fell 3.2%, as against the 1.2% decline in the Nifty. Vedanta led the losses with a 7.9% fall, followed by National Aluminium Company, Hindustan Zinc and Jindal Steel, which declined 4-6%.

“Metal stocks had become technically stretched, so a short-term pullback was in the offing,” said Netra Deshpande, research analyst at Mirae Asset Sharekhan. “The block deal activity in Vedanta and broader market profit-booking have also added to Tuesday’s decline,” she said.

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Peace talks, falling prices and signs of domestic slowdown weigh on companies

Metal stocks have been among the top gainers since the West Asia conflict broke out, as supply disruptions in West Asia and resilient demand drove up prices on the London Metal Exchange (LME). The rally fizzled out with traders cutting their positions following the peace talks between the US and Iran around mid-June.

“Easing geopolitical tensions and subsequent unwinding of risk premiums led to a fall in aluminium, steel, copper, and zinc prices, which have weighed on sentiment,” said Anita Gandhi, head of institutional broking at Arihant Capital.

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Concerns over the impact of probable interest rate hikes by the US Federal Reserve on the dollar also played spoilsport.

“A firm dollar index is likely to keep exerting downward pressure on metal prices, and its trajectory will be key to determining how metal stocks perform going forward,” said Gandhi.Despite the recent drop, the Nifty metal index is still up 13% so far this year, compared with an 8.9% decline in the Nifty.

Deshpande said Vedanta Steel, Vedanta Aluminum, JSW Steel, Hindustan Copper, Gravita India and Welspun Corp are likely to remain relatively resilient, while Vedanta, Hindalco and NALCO may continue to face some pressure in the near term.

Market participants advise against buying metal stocks immediately.

“While metal stocks had outperformed in recent weeks due to firm prices, after the recent correction in prices, we are taking a wait-and-watch approach,” said Gandhi. “We would prefer to see how companies navigate lower commodity prices and a domestic slowdown before recommending fresh exposure to the sector.”