While domestic metal companies will be affected by the decline in metal prices, producers will benefit from the rupee fall but their imports will become expensive
Metals are bearing the brunt of global risks, which only seem to be mounting every month. August saw the US ratchet up trade tensions with Turkey, setting off a rout in emerging market currencies as investors took refuge in the dollar. Earlier, trade tensions between the US and China and economic sanctions on Russian entities roiled metal markets.
One could argue that the events triggering these falls are external to the industry and once they calm down, prices will regain lost ground. While that may be true, the tensions show no signs of calming down. Meanwhile, the fall in prices will hurt producers, who will now earn less than what they did a quarter ago.
Lower earnings will see investors slash their profit expectations, in turn affecting valuations. A bigger fear is that these tensions will slow global economic growth, causing lasting damage.
Those studying the economic effects may have their eyes on Dr Copper and whether it has got it right this time. The metal, nicknamed so for its apparent ability to predict economic conditions, has gone below $6,000 a tonne on London Metal Exchange and is down by 17.6% so far in 2018.
Copper also had some bad news of its own to report. The workers’ union at the world’s largest copper mine, Escondida, Chile, approved the terms of a new wage contract, last week. The possibility of a strike at the mine was one of the hopes that copper prices were holding on to, which has been dashed now.
If that settlement poses a supply risk, the market fears a demand risk as well. Fears that the Chinese economy may slow down still linger. Industrial output rose by 6% in July compared to the expected 6.3%, said a Reuters report. Fixed asset investment grew slower than expected at 5.5% in January-July compared to expectations of 6%.
China’s economic health is vital for commodities. In 2018, demand for refined copper is estimated to have risen 1% till April from a year ago, according to the International Copper Study Group. This was made up by China’s demand growing by 3%, with ex-China usage declining 1.5%. With the market showing a slight surplus, any slowdown in China could worsen the demand-supply balance.
These fears are what have led to a 29% decline in zinc prices in 2018 so far and by 10% in aluminium prices. Aluminium is a special case where the US sanctions on United Company Rusal Plc saw prices zoom on fears of a supply crunch and then fall back.
Domestic metal companies are likely to feel the heat from the decline in metal prices. However, producers will benefit from the depreciation of the rupee against the dollar. But their imports will become expensive, so those importing coal or other raw materials may pay more.
The fall in zinc prices is especially sharp, with August alone seeing a decline of 8.8%. This is likely to put some pressure on Hindustan Zinc Ltd, and adds to the woes of parent company Vedanta Ltd, whose iron ore mines in Goa and copper smelting plant in Tamil Nadu are not operational.
While the near-term impact on financial performance is one aspect, the bigger worry for investors is the uncertainty caused by the continuing tensions between large economies. Nearly every other month brings more uncertainty, adding to the volatility in metal prices. For now, they should watch China’s economic data for red flags on whether the slowdown is temporary or more deep-rooted.
Subscribe to Mint Newsletters
* Enter a valid email
* Thank you for subscribing to our newsletter.
Never miss a story! Stay connected and informed with Mint.
our App Now!!