Metal prices are on a tear as investors bet on global economic recovery amid supply side constraints. China’s benchmark iron ore futures surged 10% to a record high on Monday. Mint looks at the reasons behind the rally.
Why are metal prices increasing?
Globally, demand is outpacing supply because of economic recovery with improving manufacturing and better demand forecast for electric vehicles where copper—prices of which have gained 34% on the London Metal Exchange (LME) this year—is a key ingredient. Both ferrous and non-ferrous metals have rallied. However, domestic steel prices are at a discount to both landed price of imports from China (20%) and export price (11%). Global crude steel production grew 15% year-on-year in March 2021, mainly due to a low base. Iron ore supply is unable to keep up with demand for high- grade iron ore in China.
Will rising metal prices lead to more inflation?
Though analysts expect a strong operating environment for metals to sustain for at least another two to three months, higher metal prices will lead to higher WPI (wholesale price index) inflation. Since India is not a big importer of metals and Indian companies follow world metal prices, the price rise will push the input cost for Indian companies, pushing WPI up, as companies may not want to absorb the cost given the covid-19 pandemic-induced stress on their balance sheets. Domestic iron ore price is still at a discount of 48% to international price.
Will commodity inflation hit other sectors?
Auto, real estate and infrastructure companies are likely to bear the maximum brunt. Bajaj Auto’s commodity input costs rose 4-5% in the March quarter, while the company has made hikes of 4%. Maruti Suzuki is substantially raising prices of its products. Tata Motors has increased the prices of its passenger vehicles by 1.8% average.
Will this impact infra development?
According to analysts, an across-the-board rise in prices is leading to input cost pressures, impacting the cost of infrastructure development. Metal prices are getting a push from the recovery in China and the US, and analysts expect this bull run in commodities to extend. Steel, the most common metal used across sectors, is at a record high and is expected to continue its trajectory. The spike in metal prices is worrying for the construction/infrastructure industry as India is spending big on infrastructure development.
Will metal prices aid steel firms in India?
Exploding metal prices are helping Indian steel companies deleverage their balance sheet and repay debt at a quicker pace. Tata Steel’s net debt declined to ₹75,389 crore at the end of March 2021. During 2020-21, it made a repayment of ₹29,390 crore, with ₹10,781 crore in the March quarter. SAIL reduced gross debt by ₹16,150 crore. Jindal Steel and Power has reduced debt from a peak of ₹46,500 crore in December 2016 to ₹25,600 crore in December 2020.