In Commodity News 07/03/2016
It was only in January that metal stocks got swatted like flies, as investors worried over their mounting troubles. That seems like a distant memory now. The S&P BSE Metal index rose 10% from its lows of 25 February and 15% from the lows of 12 February. What explains the celebratory mood?
The budget is the most recent factor. Sticking to the fiscal deficit target and the focus on reviving investments appear to have revived investor confidence. Duty hikes for certain non-ferrous metals, eliminating export duty on iron ore and a focus on local manufacturing are the other positives. The revival in infrastructure investments is likely to be gradual and duty hikes will afford some protection. These factors alone seem insufficient to explain the jump.
Rising steel prices after the government hiked minimum import prices is another explanation. But that’s old news and steel shares had corrected then too. News that steel companies are planning to hike prices may have given investors confidence that the minimum import price can actually make a difference.
One part of the answer can be found in international markets. The Bloomberg Industrial Metals Index has been moving up in February.
Iron ore prices are holding steady around $50 a tonne, making those who thought it will go below $40 a tonne pause for thought. Non-ferrous metals too have bounced, with copper, zinc and aluminium gaining in February.
This combination of firm international metal prices and lower pessimism about domestic conditions have benefited metal shares. The budget sets the stage for a continuation in interest rate cuts, another potential boost for metal producers.
Higher international iron ore prices set the stage for an increase in steel prices. That and higher global non-ferrous metal prices augur well for domestic prices. Domestic steel realizations are anyway moving up, due to the minimum import price. If the uptrend continues, metal producers’ margins will improve. Iron ore exporters will certainly benefit from zero export duty on iron ore and higher realizations.
Can this last? The domestic climate appears to be improving, although it is yet to reflect in the form of rising output. Better realizations are what one can expect for the moment. It’s a different story in international markets. China remains the single biggest risk. Latest manufacturing data shows it is still in trouble.
The bounce in iron ore prices can be attributed to a seasonal post-holiday inventory build-up. If that is the case, we should know soon enough. A hike in US interest rates is another risk, as that can again see money flowing away from commodities towards the dollar. International markets continue to hold most of the answers to the question of whether Indian metal producers are headed for better times. Keep a watch there.
