The BSE Metal index declined nearly 7% also on concern over the impact of the crisis unfolding at China’s Evergrande, the country’s second largest realtor, heightening fears that a housing sector slowdown may hit commodity demand in the world’s largest consumer of metals.
and Jindal Steel & Power shares sank more than 9% while SAIL, NMDC, JSW Steel, Hindalco Industries and Vedanta slid 5-8%.
“Lead indicators of Chinese demand for steel continue to worsen. Weak real estate data as well as contagion fears on account of debt defaults in the high-yield developer market, sets a context for the current steel production cuts,” said an ICICI Securities note authored by Abhijit Mitra and Mohit Lohia.
“Risk-reward in steel equities is further worsened by the precipitous fall in iron ore prices,” the note added.
Analysts said one should avoid metal stocks in the short term till the concerns about Evergrande and the contagion impact fade.
“In the metals space, if China sneezes everybody gets cold. Metal prices are down as a real estate company possibly going bankrupt, there is a big concern,” said AK Prabhakar, head of research at IDBI Capital Markets.
“A correction was expected in metals so we need to be cautious but at lower levels. Valuation wise, except for SAIL, nothing is cheap, I would wait for at least 15-20% to buy other steel stocks,” said Prabhakar.
The metal index had gained about 148% in the last one year till Friday, outperforming the Sensex which had gained 56% in the same period.
Chandan Taparia, derivative analyst at Motilal expects top steel stocks to correct 5-8% more.
“We expect weakness in metal counters to continue, they are breaking below their short-term moving averages and falling below support trendlines. We expect more weakness of 5-8% in counters such as Tata Steel, SAIL, NALCO and Jindal Steel,” said Taparia.