Government blows $850-million hole in metal stocks as foreigners flee export duties

Government’s intervention in the basic commodity sector in late May to stem unfettered price inflation has forced foreign portfolio investors to make a beeline for exit from shares of commodity producers.

In the previous two months, foreign portfolio investors have dumped metal stocks worth Rs 6,754 crore ($854 million) in the wake of the sudden shift in the outlook for the sector following government’s strict action on metal exports including steel products.

In late May, the government announced a surprise hike in export duty on steel along with duty on export of iron ore, which is a key raw material in steel manufacturing. Further, the government reduced import duties on coal imports to lower input costs for steel mills.

The Nifty Metal index has given up 14 percent of its value since May 20 when the measures were announced.

The measures have adversely affected the price of steel in the country with rates in several regions falling more than 20 percent. Certain steel mills are now considering forced maintenance as export demand cools off in the wake of steep duties.

The shock and awe of the measure was such that some analysts put their coverage on the metal sector under review given heightened uncertainties. “The current measure will impact the ability and will of the companies to continue with their long term capex plans and the firms will only commission capacities where capex has been significantly committed,” brokerage firm Motilal Oswal Financial Services said in a recent report.

In the four months prior to May, metal and mining was one of the few sectors boasting net inflows from foreign portfolio investors.

Between January and April, foreign portfolio investors net invested Rs 9,300 crore in shares of metal and mining company, according to data available with the National Securities and Depository Ltd.

The inflows in the sector were driven by increased optimism on the sector on the back of surging global commodity prices following Russia’s invasion of Ukraine. The Bloomberg Commodity Index, a widely tracked gauge of global commodities, surged 37 percent in the first five months of 2022.

However, while the majority of the blame for the sudden shift in sentiment against metal stocks among foreign portfolio investors goes to government intervention, rising concerns of a global economic slowdown have also played its part.

The Bloomberg Commodity Index has fallen more than 14 percent since mid-June while several global base metal prices are 15-20 percent off their recent highs as traders fear demand slowdown even as supplies remain constrained.

“Global growth slowdown is a key risk for commodities stocks, especially those where valuations have expanded amid commodities boom and earnings growth are likely to slow in 2023 on a higher base,” investment bank Nomura Asia said in a recent note.

Going ahead, analysts believe that the outlook for metal stocks in India will hinge on any possible reversal of the measures undertaken in May and possible upswing in global prices on the back of stimulus spending by China on its economy.Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.