Nifty Metal Index Crashes 2.5%: Global Commodities Drag

On Thursday, all 15 of the 15 constituents in the Nifty Metal Index experienced selling pressure, with Hindustan Zinc down nearly 5% to ₹599.25. The Nifty Metal Index dropped 2.5% to close at 11,231.15 on the NSE.
NALCO and Hindustan Copper were down 4.3% and 4.7%, while Vedanta was down over 3%. Amongst steel names, Jindal Steel, SAIL, and JSW Steel also suffered further losses because of this trend. 

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Global Commodity Linkage

The declines in metal shares synchronised with a general decline in international base metals. Besides the general decrease of over 2% in copper and nickel, the Shanghai Futures Exchange was seen to have declines of 1.99% for aluminium; 1.40% for zinc; 1.75% for lead, and 1.53% for tin. All of these declines directly affect the revenues, margins and cash flows of Indian producers of metals, who heavily depend on export and global prices. 

Profit Booking After Rally

As per news reports, the selling pressure has come from two things: 1) High Valuations and 2) Systematic Profit Taking Following Recent Record Highs For Commodities. Usually, once the paper market cools, there will be a movement of short-term unwinding, especially leading up to weekends.  Metal cycles are typically cyclical in nature, usually going through six phases during the entire cycle: Increase, Consolidation, and Decrease. As such, regular corrections would be expected to occur with Metal Cycles.

Domestic Context and Triggers

The Indian metal pack had bounced up sharply due to expectations that China would stimulate the economy, as well as supply worries about the products that make up this index. However, the downward trend now seems to have reversed, as a result of worldwide "risk off" sentiment. The stronger U.S. dollar and increasing treasury yield have also caused upward pressure by increasing import and opportunity costs. Tata Steel has demonstrated relative strength compared to the other Nifty Metal constituents by posting the smallest drop.

Cycle Dynamics

India's metals contribute approximately 7% to 8% of the country's overall exports. More than 60% of these products depend on global pricing. The approximately 2.5% price drop over just one day experienced by the Nifty Metal index is consistent with the historical correction (average decrease of 3% to 5% after a 10% rally) that would likely occur. 
While there is significant upside potential for the Indian metals sector, primarily in alternative/future markets and through the PLI scheme, through FY28 it is expected to increase at a CAGR of approximately 12%. The sustainability of the sector will depend on whether or not the upward price trend for commodities resumes or whether the global economy continues to show signs of weakness.