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Gauging China’s impact on the metals industry is a bit like crossing the average Indian road. To stay alive, it’s a good idea to keep looking left and right constantly while crossing, till you reach the relative safety of the other side. China’s trade data last week again set off fears of a slowdown, with copper getting bruised first. This week, other metals have joined suit.

Indian metal stocks fell in response. On Tuesday, the BSE Metals index fell by 3.5 Percent compared with a 0.5 Percent decline in the broader market. This column had earlier written about the impact on copper. On Monday, iron ore prices joined suit, falling by a sharp 8.3 Percent and signalling the ore’s entry into bear terrain by the definition of having fallen 20 Percent from its August levels. The fear is that this price slide will soon spread to other metals, too.

Iron ore is a key steel-making ingredient and a sustained decline in its price usually signals bearish times for steel as well. A slowing Chinese economy is likely to result in weaker demand for metals and their inputs. But a bigger short-term worry is that credit-related woes may see the metal currently tied up in collateral-financing come on the market. That could hasten the decline in metal prices.

This has implications from India’s perspective. It is generally not good news for its mining companies as they are likely to face pressure to drop prices if international prices continue to decline. Metal companies who use inputs such as iron ore may find their costs declining. They may also find realizations decline. The bigger worry for them may be the rupee’s strength on the back of foreign institutional investor inflows. In a recent report, Fitch’s India Ratings and Research said that if the rupee appreciates to above 60 per dollar level, it would affect the margins of Indian metal firms.

This gloomy scenario could change if a few factors come into play. One, if the Indian economy revives, then domestic demand for metals should recover eventually. Second, better economic conditions in developed markets could counter China’s downward pull. The US economy appears to be recovering, though the same can’t be said about Europe.

The last point brings us back to the roads analogy. The Chinese economy can’t be trusted to decline in an orderly fashion. What if its mandarins decide that it’s time to march forward again? Caution and pessimism are buzzwords for the moment but keep your eyes peeled in both directions.

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