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Metal stocks hammered as inflation, interest rates and export duties bite

Data shows that the export duties have hit domestic steel prices, which have continued to decline for 10 successive weeks

June 20, 2022 / 04:16 PM IST
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Metal stocks in the last few sessions seemed like they were melting in a furnace with the Nifty Metals index down about 33 percent to 4,540.9 (on June 20) from its 52-week high of 6,825.65. Nifty Metal is now near its lowest level since April 2021. The BSE Metals index has corrected sharply by 20 percent so far in CY22. BSE Metals index lost 4.46 percent in today's trade to close at 15,217.88.

The Russia-Ukraine war led to a strong rally in metal prices up to the beginning of April. Since then, however, prices came under pressure due to COVID-related lockdowns and a slowdown in China. Central banks raising interest rates to mitigate inflationary pressures and an expected economic slowdown are also major reasons for the decline.

“The cool-off in the metals index is attributable to the aggressive inflation targeting commentaries and policy rate action by federal banks in India and other major economies,” said Divam Sharma, founder, Green Portfolio.

The meltdown is especially evident in ferrous metals like steel which have seen a significant correction especially after India levied export duty on exports of steel from India.

No respite in sight from the export duty

The government surprised the industry with the imposition of export duty with effect from May 22. The duty is 50 percent on all grades of iron ore, 45 percent on pellets and 15 percent on non-alloy steel except part of semi-finished steel.

“The government imposed the export duty on steel to bring down domestic steel prices. The desired impact was visible within a week as steel prices corrected across all grades,” said Sneha Poddar, AVP, research, broking and distribution, Motilal Oswal Financial Services.

The data shows that export duties have reined in domestic steel prices with prices for the alloy in the traders’ market falling for the 10th week running last week.

Despite the inventory build-up and decline in retail sales, there have been no cuts so far in the export duty. However, domestic steel producers have partial relief in the form of a decline in coking coal and iron ore prices, resulting in higher spreads. The local price of iron ore has fallen as export duty was hiked on the raw material as well.

Domestic steel prices continue to soften

According to a report from Edelweiss Research, the price of domestic hot-rolled coil (HRC) in the traders’ market was down a further Rs 1,500a tonne (week over week) at Rs 61,400 per tonne.

“Our channel checks indicate that retail buyers are still reluctant to buy, expecting further price cuts on the back of falling coking coal price,” the Edelweiss report said. Since the imposition of export duties, domestic HRC prices are already down 14 percent or by Rs 9,350 per tonne in the traders’ market.

Secondary rebar price, however, is stable at Rs 52,700 a tonne as there are nascent signs of a demand pick-up on the rural side. In the past three weeks, spot raw material spread, however, has improved 22 percent to Rs 26,125 per tonne as coking coal and domestic iron ore price have cooled off 25 percent and 30-35 percent, respectively.

Iron ore prices in a downward spiral

Iron ore prices in the domestic market have corrected after export duties on iron ore and concentrates were raised by 30 percent to 50 percent. “Duty is now imposed on iron ore of all grades as against duty of 30 percent imposed only on Fe (ferrous) content of 58 percent and above grade before the announcement, which is resulted in a decline in exports and a kind of oversupply in the domestic market,” said Navin Kulkarni, chief investment officer, Axis Securities.

The fresh lockdowns in China and its zero-tolerance policy have further derailed hopes of any sharp rebound in economic activity. The rainy season in many parts of China that usually disrupts construction activity and restrictions put in place to contain COVID-19 outbreaks have hit demand in the world’s top steel producer, squeezing mills’ margins.

Chinese export prices are witnessing a decline week over week. According to, iron ore extended losses to a sixth session on Friday, marking its steepest weekly slump in six months, as Chinese steel mills opted to reduce output amid weak profits and deteriorating demand prospects.

The most-traded iron ore contract, for September delivery, on China’s Dalian Commodity Exchange ended daytime trade 5.9 percent lower at 821.50 yuan ($122.64) a tonne, after earlier tumbling to 815.50 yuan, the lowest since May 26, a report from said.

The reversing cycle

The world had witnessed an unprecedented rise in the prices of commodities like aluminium and steel due to increased demand, supply-side shocks and higher inflation. “The increase in raw material prices boosts the revenue of the metal companies which led to the higher prices of the stocks of metal industry,” said Ravi Singh, vice-president and head of research, ShareIndia.

However, higher prices impact demand in the medium to long run. “Secondly, to limit the volatility in steel and iron ore, and to cool down the prices, China reintroduced several rules to control trading like increase in trading fee, margin requirements and limits which resulted in significant cool-off in the metal prices,” added Singh of ShareIndia.

Impact of interest rate hikes

Experts are worried about the double-edged sword facing the global economy in the form of rising inflation and the resulting increase in interest rates across economies.

“The recent rate hikes by major central banks globally could trigger global economic slowdown and impact demand,” said Abhijeet Bora, an analyst at Sharekhan by BNP Paribas. He believes global inflation headwinds could impact the overall demand environment and earnings outlook for metal space.

The US Federal Reserve has raised the interest rates along with central banks in Europe and India, which would put further downward pressure on steel prices.

“Demand outlook softened across geographies as rate hikes tackle the inflationary pressure, putting the focus on the demand side of the supply-demand dynamics,” said Kulkarni of Axis Securities.

Expectations of further interest rate hikes by central banks globally is also negative for commodities prices as well as demand.

Metal stocks

Experts do not exude much confidence in the overall metals sector, given the number of challenges it faces.

Capex plans for steel companies will be under the scanner as lower margins may lead to pressure on cash flows in the future and given that the monsoon is seasonally weak for steel companies.

Aluminium output in China rose to 3.42 million tonnes (mt) in May 2022, up 3.1 percent year-on-year as per the National Bureau of Statistics, and up from 3.36 mt in April. The COVID-led lockdowns have not impacted smelting while downstream demand has been hit. Aluminium prices have corrected and are trading in the range of $2,500 a tonne. Raw material and energy prices are expected to remain elevated in the short to medium term, thereby affecting the margins of aluminium producers.

The decline in aluminium prices has put pressure on stocks such as Hindalco and NALCO.

“The market is factoring in a slowdown in the US and European markets and, as a result, expects demand loss for aluminium products,” said Kulkarni, who remains bearish on the steel and aluminium sector in the current macroeconomic scenario and prefers downstream metal stocks like APL Apollo Tubes over upstream metal and steel companies.

“Metal companies are not going to see the super normal profits they enjoyed in FY22,” added Sharma of Green Portfolio, as prices will be under pressure, whereas input prices (including energy cost) will continue to remain high. “We are currently underweight on the sector,” he said.

Poddar of Motilal Oswal concurred and advised investors to exit metal stocks and enter later once there are signs of a demand revival.

On the other hand, Ravi Singhal, vice-chairman, GCL Securities, is of the opinion that, “as long as housing loan rates remain lower than the average over the last 10 years, demand for housing will remain high and the government's focus on infrastructure is also helping demand to remain stable. So buying on the dips is a good strategy.”

Disclaimer: The views and investment tips of experts on are their own and not those of the website or its management. advises users to check with certified experts before taking any investment decisions.

Gaurav Sharma