Industrial metals: A good long-term bet

There's a straightforward link between industrial metals (ferrous and non-ferrous) and manufacturing. Metals are used in value-added products, ranging from safety pins to ships, skyscrapers and bridges. Higher economic growth automatically translates into metal demand.

In the past 10-15 years, China has become the manufacturing hub of the world and it is an importer of metals. China's metal consumption is linked to its exports profile, as well as its internal consumption. Hence, if global demand is high, it imports more metal.

The global metals markets are driven by China. If the Chinese economy slows, the global demand for metals drops and vice-versa. This is a simplistic way of looking at the demand side but it works well enough.

On the supply side, in most cases, metal supplies come from regions with reasonably stable politics. However, as in the case of India, the mining industry has a history of causing local political disruptions and that can affect supply.

It's interesting to compare the metals sector with energy. Supply is more or less predictable in metals but demand can vary a lot, depending on the economic growth. This is in contrast with energy where the supply is always being affected by war, riots or regime changes, but core demand is pretty stable. Of course, metals can, to a large extent, be recycled. But both primary metal production and recycling requires energy. In fact, in production of most metals power is often the biggest operating expense.

India has a very low per capita metal consumption - way below the other developing economies, let alone the First World nations. If GDP continues to grow at trend rates of above 7 per cent, the Indian metal consumption will grow even faster.

India's demand will probably become a significant global factor. This is one reason why some long-term thinkers have been forecasting a very long running bull market in industrial metals.

The Indian government and various state governments are also pushing on the mining front to try and drive investments. Lately, there appears to be a realisation that fuelling Naxalite insurrections by forcing projects through is not the best way to develop the sector. There is an enormous amount of reform required, starting with legislation on land acquisition and compensation policies to environmental policy streamlining, and cleaning up the process of obtaining clearances. It may take years and there will be hiccups.

As of now, the global growth is slow and China seems to be making a conscious effort to cut its inflation. This means industrial metal producers are not doing particularly well. They are certainly not at the high point of their respective cycles. The sector could be a good long-term bet.

The author is a technical and equity analyst