Commodity Analysis

Don’t expect metal price recovery to be robust, says Gopal Agrawal of DSP Mutual Fund

Satya Sontanam | Updated on June 07, 2020 Published on June 07, 2020

Demand for base metals expected to contract by about 10 per cent this year: Gopal Agrawal, Senior Vice-President - Equity, DSP Mutual Fund

Metal prices had already been in the doghouse in 2018 and 2019 on account of trade tensions and uncertainty. The Covid-19 pandemic came in as a big blow to the metal industry across the globe, impacting the demand and supply of these metals in 2020. Gopal Agrawal, Senior Vice-President - Equity, DSP Mutual Fund, who closely tracks commodities and international trade, saysthat the problem of demand destruction for base metals is much higher than their supply-side constraints. He thinks global metal prices will take 9-12 months to return to pre-Covid levels. Excerpts:

How is the Covid-19 crisis impacting the demand and supply of base metals?

Covid-19 has had a very negative impact on the demand for base metals, which is directly dependent on the health of the global economy. With world GDP growth forecasts down by about 3 per cent in 2020, the demand for base metals is expected to contract by about 10 per cent this year. This, too, assuming that the demand starts to revive in the latter part of 2020. If there are any negative surprises such as a second wave of infection, then demand destruction will be even higher. For now, the uncertainty looming around would be a hindrance to the demand.

The supply side of the base metals, too, was impacted due to Covid-19, but demand destruction was much more visible. As soon as the demand picks up, metal prices will go up. The current trading prices of the metals are unsustainable. For instance, at the current market prices of aluminium, the high-cost producers in China (almost 60 per cent) are making losses. In India, too, most of the aluminium players have already been incurring losses and will suffer further.

Base metals recovered fast after the 2008 crisis. Will the recovery this time be as fast?

Prices will recover fast, but not as fast as in 2008. There is a difference between 2008 and now.

Before the 2008 crisis, the world was growing at 5 per cent and there was strong capex. However, this time, before experiencing the fallout of Covid-19, world GDP growth was hardly 3 per cent. The investment cycle was also weak as corporates and governments across the world had been saddled with debt.

Thus, I don’t expect the price recovery to be too robust, but we will have a reasonable recovery compared with the subdued prices we are at today. It would take minimum nine months to get back to the pre-Covid levels.

Which metal will likely have a faster price recovery ?

Copper and zinc are better-placed to recover once the demand revives. Copper will take support from its high production cost, while zinc will have a leg-up at about $2,000 per tonne; it is not a profitable business for most of the high-cost producers.

Recovery for aluminium may take some time because key user-industries such as automobiles and aero industry are unlikely to recover fast. Input prices for manufacturing the white metal, too, are low currently, which will deter the prices of the metal from moving up. So, aluminium prices may not go to the pre-Covid levels so easily.

China announced a stimulus package which is equivalent to about 6 per cent of its nominal GDP. Will this help improve the demand for base metals?

In the recent stimulus package, China has not given any significant push to infra. So, one cannot say that China’s stimulus will drive demand for metals and thus the commodity prices. Recovery in the prices will happen only when the whole world recovers.

What’s your view on India’s stimulus package? Can it revive the demand for metals?

I do not think so, because this package is primarily for survival of the population in the lower pyramid and does not play a big role in infra-spending.

Having said that, organic demand is expected to improve post-September on the back of expectation of a better monsoon, which will eventually give a leg-up to the demand for metals.

Will any structural change in spending by the population impact demand for metals?

Demand is based on consumer confidence, which is a function of psychology. So, it all depends on how things shape up going ahead. I think people in India are generally optimistic and we will go back to normal if things start to improve.

Are Indian metal companies, at least the integrated players, strong enough to sustain this demand and price crash?

Indian metal producers have certain inherent advantages because of low cost of production and integrated operations.

With coal and energy prices falling, input costs will fall further. And rupee weakening is a positive (in terms of realisations). Thus, Indian companies are supported by these factors and will have cash flow at least to service their debt and survive.

Do you think LME metal prices have bottomed? And what is the upside?

I think so. I can tell the prices at which these metals may take support. Aluminium below $1,500 per tonne is not sustainable because it is not profitable for the makers. The same principle applies to copper, which will take support at $4,500/tonne. And in case of zinc, the support would be at $1,900/tonne. It is difficult to forecast for lead, as it is currently banned in many countries. My hard guess is that it may not fall below $1,500/tonne.

The upside to the prices of these metals will be a function of demand recovery.

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Published on June 07, 2020
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