Vijay Kumar Gaba

 The strong rally in global metal prices, and consequently metal producers, appear to be faltering. Chinese authorities have taken a number of measures to calm down the steel and iron ore market. Iron futures have fallen sharply in past couple of weeks. Besides, steel and base metals like copper and aluminium have also corrected sharply from their recent high levels.

A few brokerages who were extremely bullish on metals from midterm viewpoint have also turned little cautious. For example, in a recent research note JM Financial stated that

“The recent spike in the headline inflation in several countries, including in the US, has been led by steep rise in global commodity prices, including metals, soft commodities and crude oil prices….”.

“For us the rally over the past 12 months was fairly predictable. But things are not as clear looking forward. We believe that market indicators have run far ahead given the context of the underlying strength of the economic recovery that is still nascent and significant supply side factors including production cuts by China in case of steel, by OPEC in case of crude oil production, and bottlenecks across various input items. Given our assessment of still weak pricing power in the manufacturing sector despite the recovery, the rising cost and inflation pressures can slow growth and consumption. There can also be supply responses to steep rise in commodity or input prices. Both these will cool off the commodity rally. Indeed the recent news indicates that the supply-demand equation for Chinese steel is now weighing on the other side.”

The note concludes that the historic low pricing power of manufacturers is incongruent with the high commodity inflation and therefore unsustainable. It is felt that “The probability of pick up in output prices in response to rising cost is lower than decline in commodity prices.”

But there are other brokerages like (Kotak on Aluminium and Nomura & CLAS on Steel) which have not yet considered revising their outlook.

A recent note by Kotak Research emphasized that “Chinese aluminum smelters are facing environment-led production restrictions whereas capacity cap is limiting future additions. With strong sequential demand recovery, global utilization has reached a decade high, has limited spare capacity and thin pipeline of fresh additions.” The brokerage accordingly forecasts “a deficit market from CY2022E to keep aluminum prices elevated and upgraded our price assumptions by 30%/19% for FY2022/23E.”

The rating agency CARE, expressed a balanced view in a recent note. It highlighted that “The demand for base metals looks strong as more countries emerge from the pandemic with strong recovery anticipated in the global economy. Economic data from US and European market have improved since April and the US dollar trended lower which is also giving supporting metal prices. The current demand fundamentals for copper, aluminium and tin are robust and future supply will need to respond to increased demand.” The bullish view was however qualified by risk from Chinese action. It read, “, on the downside risk Chinese authorities have announced that they will track commodities prices more closely, and are prepared to take measures to steady raw materials prices. High commodity prices will also increase the project cost of infrastructure development activities announced by the major economies to tide over the pandemic driven slowdown. High commodity prices of copper and aluminium will also increase the cost of transitioning to green energy and may lengthen the time taken to reach the climate goals.”

The market however seems to be embracing the idea of peak commodity inflation with Nifty Bank outperforming Nifty Metal by 7-8% in past 3days. It is to seen whether this divergence is beginning of a new trend or just a minor correction in a midterm trend.