 "The shares of aluminium manufacturers rallied on Monday on the back of a sharp rise in the price of the lightweight metal over the weekend, following China's announcement that it will withdraw export tax rebate for the commodity.")
A sharp decline in commodity and crude oil prices following the US’ announcement of reciprocal tariffs may weigh on Indian stocks and corporate earnings.
Historically, commodity and crude oil markets have exhibited a high positive correlation with equity valuations and company profits. Analysts caution that falling commodity prices often signal weaker economic growth and softer aggregate demand — both typically have a dampening effect on corporate performance.
While the correction in commodity and energy prices may improve margins and earnings for user industries — such as fast-moving consumer goods, paints, cement, pharmaceuticals, and automobiles — these benefits are likely to be offset by deteriorating earnings in commodity-producing sectors, including mining, metals, and oil & gas.
The CRB Commodity Index — which tracks 19 commodities, including crude oil, natural gas, industrial metals, agricultural goods, and precious metals — is down 1.4 per cent so far this April, while Brent crude and the London Metal Exchange (LME) index, tracking industrial base metals, are down 13.7 per cent and 9.1 per cent, respectively. The Nifty 50, on the other hand, has corrected 4.2 per cent on a month-to-date basis.
“Historically, commodity prices, corporate earnings, and equity markets tend to move in the same direction. A sharp correction in commodity prices points towards weaker revenue and profits for companies in upcoming quarters,” said Dhananjay Sinha, co-head of research and equity strategy at Systematix Institutional Equity.
Sinha noted that lower crude oil prices might help temper wholesale inflation. However, the overall impact on retail inflation remains uncertain, as commodity corrections are often accompanied by a depreciation in the Indian rupee, which could push up input costs.
In 2020, for instance, stock prices and corporate earnings fell sharply due to the Covid-19 pandemic, coinciding with steep declines in crude oil and industrial metals like copper, aluminium, and steel.
Between January and April 2020, the CRB Commodity index fell 12.6 per cent. Brent crude dropped 58 per cent over the same period. By comparison, the Nifty 50 corrected 17.6 per cent, while its index-level earnings per share (EPS), a proxy for corporate profitability, declined 13.3 per cent.
Conversely, the Nifty 50 surged 74 per cent between April 2020 and April 2022, underpinned by a 51 per cent rise in index EPS. Over the same period, the CRB Commodity index climbed 82 per cent, Brent crude soared 350 per cent, and the LME index rose 102 per cent.
At the height of the post-pandemic commodity boom, producers like Tata Steel, JSW Steel, Coal India, NMDC, Reliance Industries, and ONGC emerged as some of the most profitable companies in FY22, lifting overall corporate earnings.
This upswing reversed in late 2022 and early 2023 as commodity and energy prices corrected. Overall corporate earnings rose 76.3 per cent in FY22, driven by a 41.1 per cent increase in oil & gas sector profits and a 146 per cent jump in mining & metals earnings. However, in FY23, aggregate earnings declined by 8.7 per cent, with oil & gas companies reporting an 18 per cent drop and mining & metals earnings falling 43 per cent.
Similar dynamics played out in the second half of 2014 through 2015. Between April 2014 and February 2016, the CRB Commodity index declined nearly 20 per cent, led by a 66 per cent fall in Brent crude and a 26 per cent drop in the LME index. During this period, the Nifty 50 advanced just 4 per cent, while index EPS fell roughly 10 per cent.
Analysts also warn that falling commodity and energy prices could weigh on India’s external trade performance. Lower prices typically translate into weaker export demand from commodity-dependent economies and may also depress remittance inflows from Indian workers in West Asia and North Africa, who are particularly exposed to the oil & gas sector.
