Investors are concerned about metal demand as data from the US and China has been disappointing.

Metal demand, already a matter of concern in the wake of the European economic crisis, got further aggravated by the recent data releases from the US and China. The LMEX index on the London Metal Exchange has declined by almost 4% in last six trading sessions from 3398.50 on August 17. On Tuesday alone, it saw a 2% fall and the LMEX closed almost near its one-month low of 3250.50. This impact was felt on Indian counters too.

While the US economic data came as a surprise with claims for unemployment benefits rising for the third week in a row and a regional manufacturing index moved into its first contraction in a year -- both reviving fears of a double-dip recession in the economy. This was adequate for providing triggers for price reversals. Worries about the US growth come at a time when investors were expecting growth in the base metals consumption, says Atul Shah, head of commodities at Emkay.

Import data from China for July 2010 was also disappointing. Imports of refined copper were down 23% y-o-y, refined zinc imports were 41% lower, while primary aluminium and lead imports were 97% and 76.2% lower respectively. The numbers are startling and August numbers will have to be watched as the trend will be very important for base metal prices.

This has lead to weakness in all the metal counters. The metal index on the BSE was down 1.8% and has seen a 4% decline in the last two trading sessions compared to a 1% decline in the Sensex. Tata Steel, Hindustan Zinc and Hindalco are trading 1-2% lower on Wednesday at 2pm.

With uncertainties on the global front, investors should avoid metal counters for the near term. As it is analysts have downgraded most metal stocks, except Tata Steel and Hindalco where estimates have remained unchanged, after Q1 results. Tata Steel and Hindalco may also witness an earnings downgrade if the scenario doesn’t improve, and investors should look at these two stocks only for the long-term.