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.