BASE METALS - MACKENNA'S GOLD!

about 7 months ago
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The BSE Metal Index is up currently over 500 points, hitting a new 52-week high. All the ten stocks listed in this Metal Index are up in the green – Hindalco, Vedanta, Tata Steel, Jindal Steel, Nalco, SAIL, NMDC, JSW Steel, Hind Zinc and even Coal India. Hind Copper too has been scaling new highs for the past couple of weeks.

These base metal stocks were up in the green even yesterday when the entire market tanked. Apart from stock prices, the actual price of most base metals is up and even in the spot market the surge is huge – since Nov’20, the spot price of alumimium is up 14.5%, copper by 33%, nickel by 29%, tin by a huge 62% and zinc by 14%. And most metal analysts are of the opinion that there is much more price rise expected in these metals in the coming few months.

So, what is this underlying optimism in this sector?  The biggest reason on which this entire surge is based is on the bounce back of the economy, not just India but globally. There is expected to be a frenzy, a resurgence of economic activity once the vaccine roll-out takes on full steam. And this is the primary ‘animal spirit’ working on the base metal demand.

In short:

  • Entire run-up in prices based on one hope - post crisis demand for metals will outstrip near term supply
  • Supply constraints are also supporting this up-move in prices
  • Production itself is at a deficit and inventories are fast depleting
  • 2021 production outlook is likely to be negatively impacted as a result of covid in a number of major South American producing nations.
  • Orders coming fast and furious from Chinese downstream sectors like infra, realty, automobile construction - demand is so high that inventories there are at their lowest level in nearly 10 years.
  • The US-dollar fell to a 3-year low on rising risk sentiment – LME metals are dollar based this making it cheaper for holders of other currencies.
  • The USA stimulus plus President Joe Biden's plan to invest heavily in its infrastructure is also driving up demand

What does all this mean for us:

Obviously, its boom time for metal companies but for almost all other companies, this is inflationary. Combined with rising oil prices too, the market might be celebrating this surge today but later, the very same metal price rise will come to bite.

On a broader and more optimistic note though - the rise in metal prices does indicate a bounce back in economic activities and that is music to the ears. Yet, once again, the underlying risk factor is the delay in re-opening of the economies caused by hiccups in vaccine rollout and efficacy and renewed risk of increase in infections. Thus if the word in 2020 was “cautious” this year it is “cautiously optimistic.”

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