Melting pot: Metal scrips wither under LME heat

BSE Metal Index down 30% even as Sensex dips 20% after May 11.

Ever since the market has fallen from its peak, metal shares have taken a severe beating following a steep fall in prices on the London Metal Exchange (LME).

The first four months of this year were extremely bullish for metals markets worldwide with prices hitting all-time highs several times.

While the Sensex lost 20 per cent after May 11 when it had hit its peak, the BSE Metal Index has registered a sharper 30 per cent decline during the period. Major metal scrips came under heavy selling pressure during the technical correction in the market.

Hindustan Zinc "� the biggest loser "� was quoted at Rs 524 today, almost half its May 11 price of Rs 1,017. Sterlite Industries plunged 37 per cent to Rs 374 and Hindalco shed 34 per cent to Rs 161. Essar Steel is down 27 per cent to Rs 39, Tata Steel 25 per cent to Rs 480 and Jindal Steel 20 per cent to Rs 1,665.

It was a supply shortage in copper and zinc that triggered the rally in metals towards the end of the last year. Speculative traders, hedge funds and index funds started off a buying spree resulting in heavy fund flow into relatively few assets.

According to experts, there is always a speculative element built into the pricing since all commodities are tradable. Although, the fundamentals have not changed, there has been major unwinding of speculative positions by hedge funds.

A fear of increase in cost of funds looms large globally. Following the increase in the US Fed rates, Japan too has, for the first time in 11 years, indicated it may consider a hike in the interest rates.

According to Si Kannan, commodities analyst, Sharekhan, "The fear of a hike in interest rates causes disproportionate volatility since most hedge funds are heavily leveraged. The increased cost of leveraging for hedge funds availing yen funding has choked money supply in the asset classes like commodities."

Domestic metal prices are linked to LME. Indian copper firms set a provisional domestic price at the beginning of every month and settle the final price against the average LME price.

Industry experts are still not sure whether the metal meltdown is over.

"Though the outlook for metal prices is weak in the short term, there is limited downside risk as the prices have already corrected by around 15-20 per cent. The recent fall in the prices metal scrips gives investors an opportunity to enter into the fundamentally sound sector at reasonable prices," feels Kannan.