Is the pressure on metal stocks likely to continue?

The fall in the metal stocks began on Friday after the iron ore futures fell sharply in the global markets from overbought territory. This was exaggerated by indications of sharply lower steel demand from China. The lower expected output was also likely to impact iron ore demand. In addition, the Evergrande fiasco in China threatens almost the entire Chinese financial ecosystem, if the company crumbles under its $305 billion pile of debt.

On Monday, metal stocks like Tata Steel, Hindalco and JSW Steel continue to be among the major losers. This has been triggered by a number of factors. There are expectations that the tapering of liquidity by the Fed could start later this year and would be followed by interest rate hikes. That is not great news for metal stocks. In addition, China has clamped down heavily on  several industries to reduce its carbon footprint. All these played a role.

Most of the steel companies have been passing on the pressure of higher input costs to the end clients. However, that would become increasingly difficult as global prices start falling. What is more important is that most of the metal stocks ranging from Hindalco to Vedanta to Tata Steel and JSW Steel have all rallied 150-200% since the beginning of 2021. With that kind of rally, some correction was inevitable.

Not much has changed structurally for the metals industry as demand remains robust and order books are full. Unless there are a series of rate hikes in the near future, any sustained correction in these metal stocks looks unlikely.

Also Read: Why did the metal index rally 5%