Metal stocks lead the losers list on the BSE since the opening bell today morning. Vedanta is down 3% at Rs.279.75; Hindalco is down 4% at Rs.232.45; Hind Zinc is down 3% at Rs.286.80. All the top stocks listed on the BSE Metal index are in the red. Tata Steel, Jindal, Steel, SAIL, JSW Steel; all are in the red.

The reason? China, in a bid to control pollution during the winter months, has put a clamp on steel output, which in turn is leading to a run down in inventories; mind you this is despite there currently is more than enough supply.  While cutting down on production during winter, China has gone ahead and super priced steel and this is what is leading to a bull run in prices. This is in turn inflating the price of iron ore, the main raw material for the other metal industries.

Citigroup in its note has stated, “The rally is expected to be driven by a further tightening of the Chinese steel market Chinese steel mills’ active restocking of high-grade iron ore, seasonally weak seaborne supply, and a recognition that iron ore supply growth passes its peak during the first quarter of 2018.”

Spot ore, which has 62% iron content has risen to an almost 2-month high at $72.68/metric ton.

Steel mills require a steady supply of iron ore in order to produce finished steel. It also requires pig iron, which is a product of iron ore lumps.