Metals touch new lows, give most Indian firms a high

Another wave of selling engulfed the global commodity markets on Monday, sending metals such as copper, nickel and zinc to multi-year lows. While metal producers in India will be further hit due to a decline in realisations, many user-companies will see their margins improve.

The LME metal index that tracks the prices of six primary metals, including copper, aluminium, lead, tin, zinc and nickel, hit a six-year low of 2,135 on Monday. The lowest point in recent years for this index was 1,614, in December 2008. The steep fall in its constituents such as copper that is down 27 per cent since the beginning of 2015 and aluminium, down 22 per cent, has dragged this index.

Prices of precious metals such as gold and silver too hit multi-year lows on Monday. The cut in the prices of precious metals since January is, however, lower compared with the base metals, at around 10 per cent.

The Baltic Freight Index, that tracks the level of global commerce, was at a 30-year low.

The main reason for this commodity crash has been the continuous flow of weak economic data from China. The manufacturing PMI for October was at 48.3, signalling contraction in manufacturing activity. Growth in industrial production in October was also weak at 5.6 per cent compared with the same period last year. This is sharply down from the growth of 19.2 per cent towards the end of 2009.

The impending rate hike by the Federal Reserve is also causing a rise in risk aversion, making money move out of various asset classes including commodity. Adding to the pressure is the dollar’s rise against most currencies.

This may, however, help India Inc going by the recent September quarter numbers of the CNX 500 companies (excluding banks and financials). The net sales of these companies shrunk 4 per cent over the same period last year.

But thanks to the crash in commodity prices, there is an improvement in operational performance. 

Aided by benign raw material prices, the raw material-to-sales ratio stood at 35 per cent as against 38 per cent during the September quarter last year. Further fall in commodity prices will only help cut costs further.

The drop in metal prices has benefited raw material-intensive sectors, such as auto and auto ancillaries in particular.

From about 61 per cent last year, raw material-to-sales ratio fell to 58 per cent in the September quarter.

Automobile companies should benefit from the fall in the price of nickel.

Nickel is used is in the production of stainless steel which is used in the manufacture of auto chassis, catalytic converters and fuel tanks.

Construction companies are likely to gain from the fall in prices of stainless steel (used in roofing and escalators) and copper (water pipes).

It should also help bring down the production cost of power equipment companies, which, if passed through, can benefit power companies.

Stainless steel is used in the production of super critical boilers used in power plants and copper is used in electrical connectors. 

Silver is used in manufacturing photovoltaic cells used in solar panels. This should benefit solar power companies. White goods companies will also benefit from the fall in stainless steel prices.

COMMENT NOW