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Weighed down by a sharp fall in prices of metals globally, stocks of commodity-based companies have seen a huge price erosion. Shares of metal companies like Hindalco, Vedanta, Tata Steel and JSPL have come off sharply in the past few weeks, falling by up to 50% from their recent peaks and analysts expect them to report muted numbers for the first quarter ended June.

Their woes are unlikely to end soon as the Bloomberg Commodity Index has fallen almost 14% over the past three weeks, indicating that lower realisations are in the offing for metals producers.

With the growing fears of a recession in the US, prices of a range of metals — from copper to steel — have declined by up to 40% from their recent highs.
Moreover, the combined impact of the Covid lockdown in China, which is the top producer of metals, and interest rates tightening elsewhere, has put a cloud over the global metal demand outlook.

The imposition of steel export duty by the Indian government, to step up domestic availability, has only exacerbated the pain of metal companies.

Global brokerage Jefferies said recently that the sharp fall in metal prices is likely to drive a big margin contraction for metal companies over FY22-24.

“Metal stocks have a high correlation to the consensus earnings trajectory and we believe the earnings cycle is inflecting down,” analysts at Jefferies India wrote in a note recently.

Rating company Icra expects a 30% drop in the operating profits of metal companies for FY23, as the government hiked duty on iron ore by up to 50% and some steel intermediaries to 15% on May 21.

Domestic steel prices have declined 22% from their peak in May, while Asian hot-rolled coil steel prices have fallen 20% and North Europe HRC prices have tanked 36%.

While global copper prices sank to their lowest in almost 20 months on Wednesday, dropping as much as 4.9% to $7,291.50 a tonne, on the London Metal Exchange, aluminium slipped 0.5% in official activity to $2,379 a tonne, nickel fell 2% to $22,200 and tin shed 3.9% to $25,000, but zinc was a touch firmer at $2,993.



Author: Howard Caldwell