Shares of metal and auto companies declined in the range of 1-6% on Monday as People’s Bank of China slashed its reference rate for the yuan by 0.15% to 6.5032 a dollar. The BSE Metal index fell 1.25% while the BSE Auto index lost 2.12% during the session, with the benchmark Sensex closing down 2.05%.
The sell-off was triggered by poor December Caixin Purchasing Managers Index (PMI) data of China. The disappointing PMI numbers dragged the Shanghai and Hong Kong markets. Caixin PMI is a gauge of nationwide manufacturing activity and includes smaller and medium-sized companies that are not covered by official PMI data.
The Shanghai Composite dived nearly 7% on Monday and the trading was suspended to contain further damage. Offshore yuan declined to the lowest since May 2011 in the massive sell-off.
Any further devaluation of renminbi would increase dumping of metals into India by Chinese companies, market participants said. India metal imports, especially in the steel sector, have seen a large uptick in the last two years. For FY15, total steel imported touched a record high of 9.31 million tonne.
To protect Indian steel companies, the government imposed a special 20% safeguard duty on steel imports for 200 days starting mid-September.
US investment banking firm Jefferies said in a research report that the short- to medium-term prospects of steel companies looked tough as falling global prices and rise in imports will continue to weigh on domestic steel prices.
“Prices remain under pressure, as domestic prices are largely driven by import parity and the balance sheet stress for steel players could intensify,” the brokerage said.
Shares of Hindalco declined 4.7% during the session, making it the worst performer among the companies constituting the metal index. Scrips of Jindal Steel and SAIL fell 1.64% and 0.7%, respectively.
Concerns over the Chinese economy dragged shares of Tata Motors. Tata Motors is the parent company of Jaguar Land Rover (JLR) and China is a crucial market for JLR, as it accounts for 25% of the company’s revenue and 33% of its operating profit. Tata Motors shares settled 6.1% lower – the steepest among Sensex companies..
Shares of auto ancillary companies also declined as the Street expected falling exchange price of yuan to make components manufactured by Chinese players cheaper. Shares of Motherson Sumi Systems slumped 3.78% while Apollo Tyres lost 2.23%.