As the new day dawns, there is another drop in metal stocks. Industrial metal prices are trading at their lowest level in months.
What is this causing investors to fear? Get this right, and it’s inflation! Inflation!
The main reason investors panic in metals stocks is also inflation.
Because the sharpening of all metals has disappeared. Large companies such as JSW Steel, TATA Steel and JSP Limited have gone “red”.
All this happened after the Ministry of Finance revised the steel and metals tariff structure. They took these steps with the intention of controlling current inflation, which is rising rapidly on all fronts.
Why are metal stocks falling?
The economic downturn in China.
China is the largest consumer and supplier of industrial metals worldwide. According to official figures, the massive Corona 19 blockade has taken a toll on the country’s economic growth.
April copper imports fell 4% year-over-year as production was out of whack and demand atrophied.
Retail sales fell 3.5% year on year in March as authorities imposed tough new measures to combat the virus.
Shanghai, the country’s financial center, was largely shut down for weeks. Tesla recently reported that it may have to halt production at its Shanghai plant, which is already well below capacity.
The company is struggling to get the production line back to normal by continuing to keep employees on site in a “closed loop” system. Even if they do everything right, such companies rely on suppliers who face similar problems causing raw material shortages.
This is a move to control inflation.
According to the Consumer Price Index (CPI), the current price increase is about 7.8%. One important factor in which inflation has reached its highest rate in eight years is food. To curb inflation, the government needs to increase productive activity and consumption in the economy.
By reducing taxes on coal imports and export duties on iron ore, steel prices will become cheaper.
Strengthen the dollar index.
In international commodity trade, the U.S. dollar is the mechanism of exchange in many, if not most, cases.
When the value of the dollar rises, it is cheaper to buy goods. At the same time, when the dollar rises, it costs more other currencies to trade commodities.
Another reason for the dollar’s influence is that commodities are global assets. They are traded all over the world. Buyers buy commodities such as corn, soybeans, wheat and oil in dollars.
When the value of the dollar rises, these currencies have low purchasing power because they need more currency to buy each dollar. Consequently, this negatively affects demand.
The process of making steel.
Understand how steel is made to understand how rates affect prices.
To produce steel, iron ore is first mined. After that, the iron ore is finally turned into steel. Over the past few years, iron ore prices on the world market have been rising. Thus, steel prices have also risen and steel inventories have increased.
In addition, China is one of the leading countries for steel imports from India.
As exports to popular countries have declined over the past two years, steel and rolled steel inventories are already at low levels.
With the recent increase in export tariffs, steel companies may have to sell their products domestically.
Supply exceeds demand.
Classical economics teaches that prices fall when supply exceeds demand.
The International Copper Research Group recently revised the growth rate of refined copper to 1.9%, indicating a surplus in the global market over the next two years.
This is mainly due to the negative effects of the Russia-Ukraine crisis and China’s Corona 19 blockade, which have weakened the outlook for the global economy.
The finance minister of Chile, the world’s largest copper producer, recently said that global growth will slow and domestic demand will remain sluggish.
According to a report by ratings agency CRISIL, steel prices, which have been high for the past two years, have finally begun to correct the weak seasonality. By the end of fiscal 2022, steel prices could be around $60,000 a ton, up from a peak of $76,000 a ton in April.
The role of coal
Recent changes in tariffs have eliminated import duties on cooking coal.
In the process of making steel, coal becomes the raw material. Coal prices have risen in recent years due to the decline in coal production in Brazil and the geopolitical crisis in China. The position to lower coal tariffs will lead to lower coal prices domestically.
Lower import duties on coal could lower steel prices.