Why Metal Stocks are Falling?

Well, these days every stock is falling but we thought why not add to the sorrow  of metal stock holders. All the Tata steel, Hindalco, JSW steel, holders, this ones for you!!  😛

Bhaago! That is the emotion most metal stock investors are having. You will be surprised that this emotion is mainly due to a song!

A perfect song for our current economic condition would be - ‘Dekho Woh Aa Gaya’, “Arrey Arrey Woh Aa Gaya.’

What could this be creating a sense of panic among investors? Guess what, and it’s inflation! 

The leading reason behind the panic among the metal stock investors also is inflation (well, indirectly). 

As all the Chamak of the metals is gone. Premier businesses like JSW Steel, TATA Steel, and JSPL Limited are all coloured in ‘red’. 

All this happened after the Ministry of Finance (MoF) made modifications to the duty structure of the steel and metal sector. They made this move intending to control the current fast-growing inflation in general. 

In this blog, we will learn about the impact on the metal businesses due to the duty changes, the details of duty changes and the industries that could benefit indirectly from it. 

So, let’s get started.

The move that coloured the metal stocks 'Red'

The Ministry of Finance (MoF) on Monday (23rd May 2022) decided to impose a 15 per cent export duty on steel. The MoF also notified export duties on more than ten iron and steel intermediaries. They reduced import duties on three primary raw materials required for steel production, such as coal. Further, they also reduced import duties on three basic raw materials needed to produce plastic. 

This move by the MoF made the metal stocks, particularly the steel stocks, move south. 

All of these moves were made to control inflation. Now, you might be thinking about how can this control inflation?

A Move to Control Inflation

The current inflation rate measured by the Consumer Price Index (CPI) is looming at around 7.8 per cent. One of the significant components resulting in the inflation moving at an eight-year high number is food and food items. To curb inflation, the government needs to increase production activity and consumption in the economy. 

By decreasing the import duty on coal and export duty on iron ore, steel prices will become cheaper. 

Let us understand how. 

The Process of Making Steel 

Let us understand how steel is made to understand the impact of duties on its prices. 

To make steel, first, the iron ore is mined. After that, the iron ore is converted into iron which is finally converted into steel. Over the last few years, the price of iron ore has been increasing in the world market. Hence, the steel price has also experienced an increase, and so have the steel stocks. 

Furthermore, China is one of the leading importers of steel from India. 

Over the last two years, with the reduction of exports to China, the steel stocks or the metal stocks have already become sluggish. 

With the recent increase in export duties, the steel companies might be forced to sell their products domestically. 

Now, as per the theory of supply, when the supply increases, the price falls. Therefore, the increased supply of steel domestically will lead to a decrease in its prices. 

The Role of Coal

In the recent duty changes, the import duty on cooking coal was waved off.

The process of making steel also requires coal as a raw material. Recently, coal prices have increased due to conditions like the disruption of coal production in Brazil, the Geopolitical contagion of crisis in China and more. The stance on reducing duties on coal will reduce its prices domestically. 

The reduction in the import duty of coal can reduce steel prices. 

Why are steel stocks declining?

When a company’s production suddenly becomes cheaper, its net revenue can decline. This is because there is a limit placed on the selling of a product. 

With the decrease in the revenue, the net profit for the steel industry might also decrease. 

For the investors, if you have invested in any kind of stock, you become part owners of the business. Therefore, a potential decline in the net profit has induced a sense of panic among the investors of steel stocks. Thus, with the negative emotion clouding the business, investors might be ready to leave with limited profits or losses. 

Nifty Metal index fell six per cent in the early trade on 23rd May 2022. Stocks of companies like TATA Steel stock price traded at 52 weeks low. Other stocks like JSW Steel, Jindal Steel and Power and more were also down 13 to 15 per cent. 

A good news for the automobile sector

As the steel stocks were all coloured in red, the imposition of high export duty on steel proved to be a piece of good news for the automobile sector. 

Recently, the excise duty on fuels was reduced. With this, there was already a sentiment of cheer in the automobile sector. But now, what are automobiles like car made of? They are made of metal. So, with the reduction in the price of steel, the input cost for the automobile industry can go down. A decrease in input or raw material cost can mean a rise in the net profit for these businesses. Therefore, with the steel businesses being induced to sell domestically, the automobile sector could benefit. 

Notable among the rising automobile stocks were Tata Motors, Ashok Layland, Mahindra & Mahindra (M & M), TVS Motors, Maruti Suzuki and Hero MotoCorp. The stocks of these automobile businesses rose between one to six per cent as the steel stocks fell by more than ten per cent. 

The Nifty Auto index on 23rd May 2022, trading well above 2.3 per cent for some time. 

Summing it up

Globally, we are witnessing the cooling down of metal prices that were once peaking. The reasons for this are several, including the Covid pandemic, the war between Russia and Ukraine, the government’s stance on export duties, and more. 

With the metal stocks, steel stocks, in particular, losing lustre, investors have started to move away from them, making them ‘underweight’ in terms of performance. 

Further, in particular, the metal or steel industry is also hugely dependent on the global markets, and its revival is a long way to go. 

Therefore, with the recent imposition of higher export duty on steel and waiving of import duty on cooking coal, the prices of steel stocks plunged.

*Disclaimer: The stock(s) discussed above aren't recommendations from Finology, they are only picked to make you understand the concept.