Nifty Auto tumbles 10% in worst week since 2020
What's the story
The Nifty Auto index has witnessed a major setback this week, plummeting by 10%—the worst performance since March 2020. The decline is due to several factors, including geopolitical tensions in West Asia and rising commodity prices. All stocks on the Nifty Auto index are currently trading in the red, with Ashok Leyland, Bharat Forge, Tata Motors Passenger Vehicles (TMPV), TVS Motor Company and Eicher Motors being the biggest losers of the lot.
Market impact
Natural gas supply concerns weigh on auto stocks
The ongoing war in West Asia has raised fears of natural gas supply disruptions through the Strait of Hormuz. This has led to heavy selling pressure on auto stocks, despite a mild recovery in benchmark indices. The Nifty Auto index fell sharply during early trade and failed to recover throughout the session. It settled 3% lower at 25,098 with all its constituents ending in negative territory.
Production risks
Dependence on natural gas for production
Automobile manufacturers depend heavily on natural gas for various stages of production, especially energy-intensive operations like paint shops, forging furnaces, casting facilities and heat treatment processes for metal components. Brokerage firm Nomura has warned that gas accounts for a substantial share of energy consumption in automobile manufacturing. It also cautioned against the feasibility of switching to alternative sources like electricity due to machinery constraints and capital requirements.
Regulatory impact
Government's intervention and its impact on manufacturing
The government has also stepped in to conserve fuel supplies by tightening distribution norms. Natural gas has been brought under essential commodity regulations with priority allocation to households and transport fuels such as CNG and LPG. Analysts warn that these restrictions could disrupt manufacturing schedules, especially for automakers operating at high capacity utilization levels with limited inventory buffers.
Inflation concerns
Rising crude oil prices and their implications
The situation is further complicated by rising crude oil prices, which have crossed the $100 per barrel mark. This has raised fears of higher raw material and transportation costs across the automobile value chain. Khushi Mistry, Research Analyst at Bonanza, said that "the Nifty Auto Index slipped primarily due to fears of a natural gas supply shortage triggered by escalating conflict in West Asia."