The Hindu Business Line : Metal mettle

This is the right time for metals producers to strengthen supply chain management, improve energy efficiency and take steps to address environmental issues.

After the bull-run of the last four years, when the global metals market was characterised by rising production, soaring consumption, expanding trade and ever-escalating prices, an unprecedented meltdown in the past four months has created a near-panic situation for producers and other stakeholders. Lowering of global growth expectations, contraction in liquidity across markets and rising inventory have combined to drive the metals market to a low, with little prospect of a recovery any time soon. It seems, the global metals market — base, industrial and precious — has priced in a full blown recession already.

Across the world, producers have already begun to respond to falling prices by cutting output. Steel, zinc, nickel and aluminium are facing production cuts. In addition, fresh investments in green-field and brown-field projects have been put on hold. There is a “crisis of confidence” in the global metals market. In the panic over falling demand, supply-side concerns have receded into the background; but they have not disappeared. It is important to realise that today’s output cuts and delayed/cancelled investments are sure to cause problems in the future, and cumulatively impact the market when recovery begins. Experts believe that metals demand could prove to be more robust now than in previous recessions of the 1970s, 1980 and 1990s, primarily because China is a decisive factor. The two Asian giants China and India together can largely offset the weakness caused by the slowdown in the West. China’s stimulus package of $586 billion will be applied, among others, on infrastructure and housing projects, which would generate demand for commodities such as industrial metals, base metals and cement.

As is well known, infrastructure projects are commodity-intensive. To beat the adverse effects of a slowdown, India needs to give a big push to infrastructure projects by injecting a massive dose of investment. It will help generate much needed employment and incomes, especially in rural areas, and thereby counter the pangs of slowing growth; and it is especially important given the continued tepid performance of agriculture. The Eleventh Five Year Plan envisages an outlay of nearly $500 billion for infrastructure projects such as roads, seaports/airports and energy. A major national thrust quickly to implement the projects is necessary. Meanwhile, metals market participants, especially producers, in the country have an opportunity to infuse operational efficiency. This is the time to strengthen supply chain management, improve energy efficiency and take steps to address environmental issues including effects of global warming and climate change. Indian companies in the metals sector must prepare themselves to take advantage of the recovery phase when it begins. The mettle of Indian metal companies is on test.

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