Bull in the metal shop
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China’s improving manufacturing outlook may be lending a shoulder to rising metal prices. The LME Index (LMEX) is at its highest in one year and indicates base metals have moved into a bull market last week, said a Bloomberg report, dated 3 October. The LMEX tracks six metals on the London Metal Exchange (aluminium, copper, zinc, lead, tin and nickel). China’s manufacturing purchasing managers index data is at its highest levels in two years, and has been stable for two months now.
China is not the only reason, but it is a big factor in what sent metal prices down in the first place. It was feared that its economic rebalancing will lead to a hard landing and affect demand for commodities. However, it still remains a large consumer and producer of metals and its shift away from investment-led growth has not been as disruptive as feared.
Some believe it is too early to call that. Michael Pettis, a China-based professor of finance and author of a popular blog titled China Financial Markets, says on his blog that China’s adjustment process has only begun and investment growth has a long way to fall, and that the world is in no position to take on this role. “Unless we were suddenly to see roaring growth in India over the next few years, which is not out of the question given how its poor infrastructure guarantees an obvious productive destination for investment flows...,” says Pettis.
India can certainly work up an appetite but is not ready to step up to the task yet. Meanwhile, there are supply side factors too that are pushing industrial metals up. The fall in prices had prompted some closure of unviable capacity, especially of ageing mines. Zinc prices have taken wing due to supply costs as also from better-than-expected demand from China. Nickel prices have shot up after fears of lower supply, as the Philippines government is cracking down on nickel ore mines not adhering to environmental norms. Aluminium and copper prices too have gained, although not as much as zinc. The risk that rising prices pose is it may encourage temporarily shuttered plants to reopen, sending output up again and potentially trip prices.
The LMEX is up by 4.3% over a year ago and by 14.8% since the start of 2016. A bull market in industrial metals and rising steel prices are good news for debt-laden Indian companies and investors. On Monday, metal stocks were on fire with Hindustan Zinc Ltd gaining by 9.2% and other stocks rising by 1-4%. The BSE Metal Index is up by 43% over a year ago and by 34.3% since the start of the year. Note that this index also includes steel stocks, which have risen considerably on the back of rising steel prices and restriction on imports. While investors in metal stocks enjoy their moment under the sun, they should remember that the risks that sent prices down in the first place are still lurking in the background.