Metals shine, but it’s still early days for super cycle

Satya Sontanam BL Research Bureau | Updated on April 24, 2021

Investors must remain cautious as the cycle is playing out when the global economy is just about recovering


After a temporary shock from the Covid-19 outbreak in early 2020, commodities, especially, industrial metals, have seen robust recovery in the last few months. This was fuelled by loose monetary policies and fiscal measures, followed by gradual recovery in economic activity and vaccination picking up pace across the globe.

Higher infrastructure spending in China and the country’s plans to cut metal production to reduce emissions, further bolstered the price rise.

In India too, while metal prices have been following the international trend, the demand was triggered by restocking of inventories by dealers, recovery in the automobile sales and construction activity, be it roads or real estate. Steel prices moved up from about ₹35,000 a tonne a year ago to about ₹55,000 a tonne now. Other base metals such as aluminium, zinc and copper too touched multi-year highs with the LME (London Metal Exchange) prices surging by 62.4 per cent, 48.9 per cent and 87.9 per cent, respectively, in the last year.

The sentiment is well reflected in the stock performance of the metal companies. The BSE Metal index has gone up 164 per cent in the last one year compared to 62 per cent rise in the BSE 500 index.

With the current boom in the metals space, all eyes are on whether it is a beginning of the ‘commodities super cycle’ — a sustained period of rising commodity prices driven by higher demand.


Current vs past cycle

It is hard not to build expectations of a commodity super cycle, given the recent rally in commodities and views from some economists that we are at the start of a new economic cycle. Though the current boom in commodities started just a few months ago, prices have surged sharply, leading to spreads (realisation minus raw material cost) similar to what was witnessed in the pre-2008 period.

As per a report from ICICI Securities, the current spreads for US HRC (hot rolled coil) steel is at $965 — a 70-year high after adjusting for inflation.

The earlier super cycle ran its course during one of the best four-year periods (2004-07) in global economic growth since the Second World War, when metal prices gradually moved up. During the said period, the world GDP grew at a CAGR of around 5 per cent. In contrast, the four-year global GDP growth (CAGR), as per IMF projections (2018-2022), is likely to be around 2.4 per cent. (IMF projections available till 2022 only).

Says Ravindra Rao, VP – Head Commodity Research at Kotak Securities, “The rally in metals in the early 2000s was mainly on the back of industrialisation and urbanisation across BRIC nations, led by China. While this time around, though there are signs of pick-up in demand, a major factor that seems to be fuelling the rally in metals is ample liquidity and loose monetary stance by global central banks.”

The current loose monetary policy is a contrast to the phase of tightening from about 2005 to end-2007 in most countries, on the back of robust global economic activity.

Outlook for metal stocks

Given this backdrop, is there steam left for metal stocks? Leading candidates such as Tata Steel, JSW Steel, SAIL and Hindalco have at least tripled in the last year, while Vedanta has gained 194 per cent.

On the positive side, despite the sharp run up in stock prices, the current valuation based on forward estimates appears cheaper than what was estimated at the peak of the earlier cycle in 2007 (see table). However, investors may need to exercise caution as the current cycle is playing out when the global economy is just about recovering, and that too with monetary and fiscal support.

The key risk to commodity/metal prices would be the premature exit of easy monetary policies due to the inflation concerns, which may get further fuelled by persistent high commodity prices. ICICI Securities points out that as the current high steel prices consolidates, there would be demand destruction across the region as the costs for the user industries run up.

Higher demand from China, which gives a boost to commodity prices, also may not continue in the long term. According to Rao, “China’s appetite for metals may be limited this time as the nation’s growth is not expected to be as high as what we saw during the early 2000s. In the near term, we may see bouts of corrections as prices seem to have run up too much too fast.”

With inputs from Hari Viswanath

Published on April 24, 2021

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