Global commodities rout pulls down metal stocks

The BSE metal index on Wednesday fell to its lowest level since May after prices of copper in London slumped to a five-and-a-half year low. Copper and other metals declined sharply on increased concerns over the health of the global economy.

The metal index closed 360 points, or 3.5 per cent down, at 9,907. The 10-metal index is down around 30 per cent since June 2014.

The fall in the metal index was led by Sesa Sterlite, which declined 7.63 per cent, followed by Hindalco Industries, 6.2 per cent, and Tata Steel and Hindustan Zinc, over 3.7 per cent each.

The shares fell on worries these companies were holding big inventories. A dip in demand from Europe and China is hurting demand for industrial commodities, including copper and steel.

Copper traded on the London Metal Exchange tumbled the most in almost six years as the metal followed oil in a commodities collapse. International funds are rebalancing their metal portfolios from the beginning of the year in view of falling crude oil prices. Brent crude has fallen 18.7 per cent in a fortnight and is trading at $45.33 per barrel.

An analyst with a large overseas brokerage house said on condition of anonymity that copper consumers like Finolex Cables, Havells and Crompton Greaves were among the beneficiaries, though the overall bearishness pulled their stocks 2-3 per cent down today. Aluminium users like TTK Prestige, Hawkins Cookers and Kalpataru Power Transmission will benefit if prices remain low. Lower aluminium prices have to be passed on to ultimate consumers and hence producers and smelters like Sesa Sterlite, Hindalco and Nalco were hurt.

“Given the price decline in metals, the profitability of metal producers will come under pressure, maybe not in this quarter, but it will surely come down,” said Vinod Nair, head of fundamental research at Geojit BNP Paribas Financial Services.

As companies sell at current prices, their cost of raw material and finished product inventories will be high, impacting profitability. It will take three to six months for companies to benefit from lower raw material costs. The impact will be higher in backward integrated companies.

The World Bank lowered its 2015 global growth outlook on Tuesday due to disappointing economic prospects in the eurozone, Japan and in some emerging economies.

Lead hit a 16-month low and aluminium was trading at a level not seen since May 2014.

“The copper-led base metals’ sharp decline this month was on ‘index re-balancing’ by global hedge funds in January. At this price, production and cost cutting cannot be ruled out. A strengthening dollar will continue to weaken commodity prices,” said Gnanasekar Thiagarajan, director, Commtrendz Research.

Copper has lost 11.3 per cent since the New Year to trade at $5596 per tonne on the LME spot market while zinc lost 7.9 per cent at $2012 per tonne.

“Indian companies’ earnings will be under pressure. In the past 12-18 months, iron ore prices have softened a lot, while major steel producers are integrated. So, while costs are not coming down for these companies, prices are coming off. Companies such as Tata Steel, SAIL and JSPL could be impacted because of their integrated operations, while those such as JSW Steel, which source iron ore from outside, could be affected less,” said an analyst, requesting anonymity.