Most metals see a spike in prices on bullish market speculation over commodities rally and a rapid revival in demand from across the world
Metal prices are on the roll driven by market speculation and revival in demand for raw material mainly in China, the US and Europe. The trend, which started around a year-and-a-half ago in metals like steel and aluminium, has now spilled over to base metals like copper and brass.
Global trends are causing an adverse impact on India where, despite lower production costs, buyers are paying a higher import parity price. “In the last six months, steel prices in particular have spiralled side by side with aluminium, copper and brass,” says Mahesh Desai, Chairman of the Engineering Export Promotion Council of India.
Most metals have seen over 50 per cent hike in input costs, while the rise was almost 70 per cent in steelmaking, over the last six months. The spike has been more since April in some metals.
A report compiled by International Banker states that commodities have been the “best performer” throughout much of 2020, particularly the second half of the year, as the Chinese economy revived faster than expected and a weak American dollar and supply challenges provided support to the prices, states the report. The S&P Goldman Sachs industrial metals index, which is part of the benchmark S&P Goldman Sachs Commodities Index (S&P GSCI), gained around 40 per cent between June and December, with copper, aluminium, nickel and zinc experiencing pronounced rallies.
But, while this rally has continued into 2021 for some industrial metals, particularly cobalt (up more than 40 per cent), tin (13 per cent) and nickel (6 per cent), others such as zinc and iron ore have faded. With fewer supply disruptions in 2021 and a demand recovery also likely before the year-end in several countries, prices should remain well supported in 2021, according to Fitch Ratings. “We forecast all metal prices to rise on a year-on-year annual average basis, with the stark exception of iron ore, which we see as one of the underperformers in 2021,” it says.
With manufactures of automobiles and electrical goods having to invest more to produce the same items, many are faced with difficult choices. In the domestic market, automakers like Maruti Suzuki, Nissan Motor India and Toyota Kirloskar Motor, have hiked prices twice in the last four to five months. Care Ratings says automobiles and infrastructure have been worst-hit. Construction and real estate accounts for almost 55-60 per cent of the total steel consumption, followed by the auto sector, which accounts for 9 per cent and capital goods and consumer durables with a share of 8 per cent and 6 per cent, respectively.
Though exports are rising on expectation of further growth in demand in developed economy, Desai says that many companies are not able to recoup their higher costs as most are in long-term contracts and it is not easy to negotiate a change in between. “We are not sure how long we will be able to pull along as we have to realise our money through exports to continue our operations. The unrealised dues due to higher input costs are around 5-7 per cent of the total production costs,” he says.
If the present trend continues, industry veterans fear the unrealised cost would enter double digit given additional factors such as reverse migration of workers due to factors like the second Covid wave and various logistics issues.
Anil Bhardwaj, Secretary General, Federation of Indian Micro and Small & Medium Enterprises (FISME), says that because of many factors particularly rise in input costs, “the situation is so grave that many of the small units are on the verge of closure, while most of the small and medium size units are working at 50 to 60 per cent capacity”.
Hoping that the domestic prices of most metals used as raw material will come down in a few months, given that the demand has dropped sharply, Bhardwaj warns that unlike small manufactures, the companies producing and supplying metals for use as raw materials are big guys with considerable sustainable power.
Take the case of Lucknow based Shashi Cables Ltd, which produce cables for power transmission lines. “The changes in prices particularly of copper and aluminium over the last month and a half have been extraordinary such that our products are generally outpriced in the market, given the company’s commitment against any compromise on quality,” says VK Agarwal, CEO of Shashi Cables.
Aluminium prices have risen from $1,400 per tonne to $2,600 per tonne over the last 15 months, while copper has also gone up from $5,500 to $10,600 a tonne. Though the ultimate buyer of cables is the government, which has a provision or formula for price fluctuation adjustment when it is doing the procurement directly, in the last three years direct purchases by the government have come down sharply. And purchase done through the big project contractors does not allow the provision of adjustment for price fluctuation. The situation has worsened further in the last one and a half years as manufacturers of many of the products face a stockpile of inventories with consumers choosing to lay off buying non-essential products.
Industry lobbies have urged the government to provide some relief by removing total duties levied on imports till metal input costs normalise. This would help bring down the input cost of aluminium and copper by 8.25 per cent, which is the import duty currently being levied, as the domestic manufacturers sell their products at import parity price.
Market sources have drawn parallels between the current price scenario to that in 2008. In the earlier scenario, prices collapsed after a similarly sharp price increase. Yet despite the similarity of the upward price trajectories, sources do not believe there will be a sharp crash in 2021 comparable to 2008.
The World Bank’s semi-annual Commodity Markets Outlook has projected that the commodity prices will continue their recovery in the first quarter of 2021 and metal prices may climb 30 per cent or may remain close to the current levels throughout the year, lifted by the global economic rebound and improved growth prospects. The outlook is heavily dependent on the progress in containing the pandemic as well as policy support measures in advanced economies and production decisions of major commodity producers, the World Bank report states.
“Global growth has been stronger than expected so far and vaccination campaigns are underway, and these trends have buoyed commodity prices. Durability of the recovery is highly uncertain,” states Ayhan Kose, World Bank Group Acting Vice-President for Equitable Growth, Finance and Institutions, and Director of the Prospects Group, in a statement.
Going forward, the World Bank holds out hope that metal prices may give back some of this year’s gains as stimulus-driven growth fades in 2022. A faster-than expected withdrawal of stimulus by some major emerging market economies could however pose a downside risk to prices.
lola@outlookindia.com