The collapse of Evergrande, one of China’s largest home developers, is “not a Lehman moment” but the fear may haunt steel and metal stocks in India

The collapse of Evergrande, one of China’s largest home developers, is “not a Lehman moment” but the fear may haunt steel and metal stocks in India
  • The correction also has to do with the concerns over troubles at Evergrande, the second largest real estate developer in China that is likely to impact the global risk appetite.
  • Analysts believe the correction and profit booking session was bound to happen as metal stocks have rallied the highest amongst others in 2021.
  • Major correction was seen in metal stocks with Tata Steel, Jindal Steel, National Aluminium Company, NMDC, JST Steel falling the most amongst others.
The correction in the Indian stock market on Monday was majorly led by metal stocks that fell on fears of falling demand for steel. This was triggered by the colossal meltdown in the shares of Evergrande, one of the biggest property developers in China.

While analysts at Citi seem to think this is not a Lehman Brothers moment for global financial markets, markets in India as well as other Asian markets seem nervous. Even markets in Europe saw their sharpest fall in two months based on the fear’s emanating from Evergande’s collapse.

Fear gripped investors after reports said China's second largest realtor Evergrande is likely to default on a $83.5 million interest due on its loans to banks. The company’s last recorded debt pile stood at close to $300 billion, including bank loans, short-term borrowings and supplier credit. Just a little over half of it, 54%, is secured i.e. the banks have assets as collateral against the amount.

Such a large default by Evergrande may leave a hole in the countrys finances, which is among the top consumers of commodities in the world. The credit squeeze ⁠— burnt and bruised banks may get wary of lending further ⁠— particularly to the property sector, and the subsequent spillover may hurt China’s economic growth and hurt demand for commodities like steel, metals and chemicals.

Investors in India have reflected the same fear.


Some of the top losers in the steel manufacturing and chemical industries:
StockSectorSep 20
Tata Steel Metals-10%
Jindal Steel & PowerMetals-9.7%
National Aluminium CoMetals-8.9%
JSW SteelMetals-7.6%
Hindalco IndustriesMetals-6.1%
Adani EnterprisesMetals-4.1%
P I IndustriesChemicals-4.8%
Tata ChemicalsChemicals-5.6%
China has reportedly told state-owned lenders of Evergrande that the real estate developer is in no position to repay interest. Also, Evergrande is believed to hold one of the biggest debt piles in all of China and globally.

The world’s second largest economy has been growing at a slower pace due to many reasons, COVID-19 being one of them. The recent crackdown on polluting industries and the tightening of regulatory leash on internet companies have added to fear of slow growth in China. Yet, Evergrande’s fall may be the biggest of factors and the domino effect may be beyond the control of policymakers in Beijing.

In India, data shows that metal stocks have rallied much more than the rest of the sectors. Some analysts feel investors have taken the Evergrande excuse to take some profit home.

IndicesThis year so far
Nifty Auto10%
Nifty IT44%
Nifty Metal62%
Nifty Pharma8%
Nifty FMCG19%
Nifty Bank18%
Nifty PSU Bank30%
Nifty Realty27%
Nifty Private Bank12%
Nifty Energy24%
Nifty Financial Services19%
Nifty Media15%

“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. Risk-reward in steel equities is further worsened by the precipitous fall in iron ore prices,” said ICICIdirect in a report.

Further, fall in automakers and banking stocks led to more fall in the benchmark index. Whether the fall of Evergrande brings doomsday for financial markets or not, investors are likely to have an eye on what’s happening in China until the matter is put to rest.

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