The Hindu Business Line : Restoring the sheen to metals

Though the metals sector is going through a rough patch with prices having crashed in the last two months, the future still looks bright, given the massive infrastructure investments lined up by China and India.

Extra Chinese spending on infrastructure will surely help the metals market.

G. Chandrashekhar

At the recently held international conference organised by Indian Institute of Metals, experts from within the country and outside shared their views on topics as varied as potential applications for metals, innovative technologies, future direction of R&D, human resources and sustainability issues.

Notwithstanding the gloom that has pervaded the entire commodity spectrum in recent months, seminar participants appeared upbeat about the future prospects for the metals sector. Indian metals market is slowly but surely integrating with the global market. So, how does the future look like for the global and Indian metals sector? The entire metals complex — base metals, industrial metals and precious metals – enjoyed a dream bull run in the last four years.

However, since August 2008, the global metals market has melted as never before. Whether steel, copper or platinum, prices have crashed precipitously. Demand has slowed down considerably. Consumers are not placing fresh orders; inventories are rising; and there is gloom all over.

Slowing growth

What has led to the sudden change in the fortunes of the metals sector? A combination of factors did the sector in. First, there has been a lowering of the global growth expectation. Not only has growth in OECD countries been slowing, but even large emerging economies such as China and India are beginning to feel the contagion effects of western world slowdown.

Secondly, there has been a contraction in liquidity across markets. Rising inventory is another issue. Poor consumption demand has meant LME stocks of base metals are on a rising trajectory.

Last, but important, among market participants, there is desperate desire to reduce risk exposure. Non-commercials (speculators) holding long position in the futures market have exited by liquidating their positions. Indeed, there has been an aggressive shorting of the market. All these have sent the metals market on a tailspin.

According to the International Monetary Fund, the world is already in recession; and the forecast for 2009 is more depressing. Critical user industries such as automobile and construction have considerably slowed considerably in many parts of the world, proving yet again the strong positive relationship between growth and metals consumption.

Non-fundamental factors

Markets are known to usually move on the basis of demand-supply fundamentals. Commodity markets have been no exception. But a big change seen in commodity markets over the last five-seven years is that non-fundamental factors have played an equally important role in affecting prices.

There are three critical non-fundamental factors that affect the commodities market, in general, and metals, in particular. They are: The US dollar; flow of speculative capital (funds); and crude/energy prices and availability.

A weaker dollar of the recent past helped push commodity prices up, especially those commodities whose price is denominated in dollars. Crude oil is a universal intermediate. Its price affects cost of production and transportation of metals, and contributes to inflation. Availability and cost of energy (power) has also contributed to supply uncertainties.

Currently, in the context of poor growth expectations, demand side concerns have come to the fore; but the supply side issues have not disappeared. History may be instructive. In the past, the world did go through periods of recession when demand slackened. But the world is not the same it was a decade ago. Although today’s macroeconomic environment is not an encouraging one, yet metals demand could prove to be more robust now than in previous recessions.

Asia, and specifically China, is indeed a decisive factor, this decade. Even with a slowing economy, the Asian giant is still big enough to offset additional weakness in 2009. Indeed, extra Chinese spending on infrastructure will surely help the metals market.

Indian Perspective

India’s macroeconomic fundamentals are robust. Healthy GDP growth rate, expanding foreign trade, two-way FDI flows, foreign exchange reserves and demography all point to the direction of the country’s economic progress.

The Indian economy is slowly but increasingly integrating with the global economy. Because of market integration, we cannot escape the fallout of global slowdown. For India, the major growth sectors are food; textiles; housing and infrastructure; energy; health; education; and leisure.

Of these, the first four are highly commodity-intensive.

The XI Five-Year Plan envisages a major focus on infrastructure development with an estimated investment of $500 billion.

In addition, there would be investments in construction of commercial and residential properties, SEZs, warehouses, needs of the Railways, automobile industry and so on. All these would involve utilisation of enormous quantities of commodities such as steel, cement, base metals (copper, aluminium) and so on.

To beat the adverse effects of slowdown, India needs to give a big push to infrastructure projects by injecting a massive dose of investment. It will generate employment and incomes, and help counter the pangs of a slowdown.

Meanwhile, the metals sector should brace itself to face the emerging challenges and utilise the current phase of slowdown to infuse efficiencies. In future, cost and quality of power are likely to become more critical. As energy is a critical input for the metals industry, ways and means of achieving energy efficiency need to be explored.

Environmental issues are sure to receive focussed attention of the policymakers and the civil society. Across the world, the long-run average costs for the metals sector are rising. There are also a variety of risks the sector faces including risks of investment, production, consumption, quality, technology, and of course prices. Corporates must make use of the current market conditions to examine every cost element, right-size the organisation, strengthen the supply chain management and infuse overall operational efficiency.

The way forward for the industry is to achieve global competitiveness. Global competitiveness may be defined as the ‘ability to produce globally acceptable quality at globally comparable cost’. Indian industries must strive to meet the objective. Government policies should be geared to create an enabling environment.

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