The scary movie playing out in metals
PremiumWill things get better? Yes. But the uncertainty is about how much worse it can get, and where is the bottom
Premium
Some years down the line, the crash in commodity prices may seem obvious in hindsight. But everybody had trusted China to glide its economy to a soft landing, and match its medal-winning Olympic gymnasts in pivoting smoothly to a consumption-led economy from an investment-led one. But this landing feels more like an aircraft making an emergency landing on Mumbai’s potholed roads.
Indian metal companies’ June quarter results had already shown the scars of falling metal prices, with steel companies getting affected. But we are now entering an uncharted territory. China’s manufacturing sector appears to have hit a wall, and it could get worse before it gets better.
Waiting for a recovery is alright if you were standing still all these years. But most Indian companies have made sizeable capital investments through acquisitions and new projects, at a time when metal prices were rising. They hoped to cater to higher economic growth globally, especially in their home market.
But all this output is now coming on stream when things are going downhill. These projects have been funded through shareholders’ funds or debt. Shareholders can wait, but debt needs to be serviced. So companies will have to produce to sell, even if at lower prices. If prices keep falling in this fashion, then companies will find themselves under financial stress, especially the ones who have racked up huge debt.
Will things get better? Yes. But the uncertainty is about how much worse it can get, and where is the bottom. Production cuts look inevitable, but who will bell the cat? At some point, low prices may even revive consumption demand. There may still be a fairy tale ending to this script, which for now promises to be on the edge of the roller-coaster ride.
Never miss a story! Stay connected and informed with Mint. Download our App Now!!
×![]()