'Commodity Supercycle' Gets a War Boost. Watch Out for these 6 Stocks

Financial markets don't like uncertainty, strife, and disruptions.

The situation between Russia and Ukraine is triggering all that and more.

There were worries about interest rate hike and high inflation but now this has combined with the Russia-Ukraine war.

Intraday price movements of 5-10% are getting frequent. Not just for stocks, but benchmark indices, commodities, and currencies too are triggering such sharp movements.

The escalating war has sent commodity and energy prices soaring, boosted safe havens gold, silver, and palladium to near their all-time highs. Meanwhile, it has sent currencies and Russian share markets down in the dumps (although Russian markets have recovered a bit).

The effect is felt on Indian markets too.

The Indian rupee hit a lifetime low as a sharp surge in global crude oil prices threatened to push up imported inflation and widen India's trade and current account deficits.

Amid these rising tensions, commodity stocks are seen as the biggest gainers.

Why?

Russia and Ukraine are both natural resource rich. They can swing prices of resources they export due to the size of their export trade.

Russia is one of the world's biggest exporters of key raw materials including natural gas, crude oil, wheat, palladium, and aluminium. So the possible exclusion of supplies from Russia due to sanctions has sent traders and importers into a frenzy.

Air and sea shipments are disrupted. Metal buyers are scrambling for replacement supplies.

This has resulted in various commodities soaring to multi-year peaks.

The S&P GSCI index, a broad barometer for the price of global raw materials, jumped last week, and saw the sharpest rise on records dating back to 1970. It is now at its highest level since 2008.

Since 2020, commodities have had a fantastic run on the back of strong demand. The term 'commodity supercycle' sparked a debate on whether the world is entering a commodity cycle or a 'supercycle', an extended phase of abnormally high prices that lasts at least a decade.

But now, it seems that the Russia-Ukraine war has boosted commodities.

Commodity stocks in India tracking the underlying commodity have already started seeing the effect in their stock prices.

Stocks related to metals like steel, aluminum and copper, which find their application in almost every product used, have rallied.

Let's take a look at the top five stocks that are poised to benefit the most as the commodity supercycle gets a war boost.

#1 Hindalco

Stocks related to aluminum are seen as the biggest beneficiaries of the Russia-Ukraine war.

Russia is a major exporter of aluminium. In 2021, the country produced about 3.9 metric tonnes of aluminium (6% of world supply), according to SteelMint.

Globally, the aluminium market was already facing a deficit due to production cuts in Europe amid high energy prices. This combined with restricted supply from China.

As aluminium will most likely face a supply crunch amid the sanctions on Russia, prices will go up.

Could go up or are already up? Well, the prices for the world's most widely used base metal have been rallying for weeks now.

And the two stocks which are impacted by aluminum prices directly are Hindalco and NALCO.

With its strong balance sheet, big capex plans and reducing debt, Hindalco's stock has already started to show an up move.

But though aluminium prices support Hindalco, there are cost pressures in India. Hindalco hedges part of its aluminum price exposure.

Another company set to benefit is NALCO.

NALCO is a pure play and has the highest leverage to aluminium prices. An increase in price of alumina, a raw material used to produce aluminium, also supports the company as it also sells alumina.

The company doubles it earnings on every US$400 a tonne increase in aluminium price.

#2 Coal India

While benchmarks Sensex and Nifty are down about 12% from their peaks, one stock which was termed as India's dead stock by many (like ITC), has gained a massive 20%.

No prizes in guessing the name. Coal India has made headlines these past few weeks after waking up from years of underperformance.

Russia is the world's third-largest exporter of coal.

Russian coal is crucial for China since it effectively banned imports from Australia amid a trade spat.

There are expectations that thermal coal is likely to find support from investors again as Europe increases consumption of thermal coal in its bid to reduce its reliance on Russian gas.

As coal prices rise, the prime company to benefit from this is Coal India. The company produces more than 80% of the coal in India and is the largest producer of coal in the world.

It offers different varieties of coal to several industries, including power, cement, and fertilisers.

An added safety here for you dear reader, is that the company sits on a huge pile of cash. It uses the cash reserve to pay dividends consistently.

To know more, check out Coal India's dividend payout history.

#3 Tata Steel

A couple of days ago, Indian steel makers hiked the prices of hot-rolled coil (HRC) and TMT bars by up to Rs 5,000 per tonne amid supply chain disruptions due to Russia-Ukraine war.

Steel prices have rallied recently and if we are to go by industry experts, they are expected to go up further in the coming weeks with the Russia-Ukraine crisis deepening.

How do Indian steel makers benefit here?

Though steel companies primarily benefit from a spike in steel prices, realisations from exports could also see a rise which will bode well for them.

Russia and Ukraine together supply around 40 m tonne steel in the international markets. The sanctions imposed by various countries has hurt the export market. It seems that both Russia and Ukraine won't be able to resume exports in the near future.

The top companies poised to benefit from this are Tata Steel, JSW Steel and SAIL. As the demand is buoyant, there will be price hikes.

Recently, Tata Steel's CEO T V Narendra said,

• Both Russia and Ukraine are manufacturers and exporters of steel in addition to being suppliers of raw materials including coking coal and natural gas. The unfolding Russia-Ukraine crisis will impact supply-demand dynamics, input costs and the overall global economy.

While rising steel prices are good for steel makers, market experts suggest that sharp jump in prices of iron ore, a major raw material, may spoil the party. Under such conditions, steel companies with captive iron ore mines stand to gain the most.

Over the past two weeks, steel stocks have showed an uptick which shows their dependence on steel prices.

Equitymaster on the recent boom in commodities

To understand the situation better, we reached out to Ace Chartist at Equitymaster and editor of Fast Profits Report Brijesh Bhatia.

Here's what he has to say on the current situation...

• As a technical analyst, the first thing you learn is "the history repeats itself" and that's exactly what is happening in commodity space.
  
  Is the Russia-Ukraine war triggering the commodity super cycle?
  
  No! If you are following my videos, I have highlighted "An Exciting New Trading Opportunity" in January 2022 much before the Russia-Ukraine talks.
  
  Thomson Reuters Commodity CRB Index is a commodity futures price index in 1957. Index broke out of 69 months consolidation zone in May 2021 and heading higher.

 

• As the chartist says, the history repeats itself and surprisingly it repeated after 18 years. In 2003, the time-cycle breakout of 69months took index to 350+ from 200, the stellar rally of 75% in the span of three years.
  
  I believe this is just the start for the commodity cycle which can continue till 2023-2024; not the linear one which was in 2003-2006.
  
  Stay invested in Commodity!

The overall picture for 2022 when it comes to commodities...

Last month, we reached out to India's #1 trader Vijay Bhambwani, to ask him about what's the course of action in this situation.

Here's what we asked...

• Give us the overall picture for 2022 when it comes to commodities trading. How should traders be placing themselves to profit from it.

To which Vijay replied...

• A savvy trader is like a python. A python doesn't feed daily. But when it does, it swallows an entire animal of prey at one go.
  
  Right now markets are nervous, on the edge of their seats and are living in suspense. Which is why you see 10-15% price moves intraday.
  
  We need to wait for the interest rates to rise and accelerate. So far it was the smaller economies like Poland, Hungary, Romania, Peru, Argentina, Brazil etc that were hiking rates.
  
  The manic price rise in all asset classes will possibly be slowed in the first half of the year and possibly even reverse in the second half. That is when markets will respond to conventional studies and trading systems. Predictability will be possible then. Right now we are staring at our trading terminals and news telerate tickers for breaking news to wait and watch where prices are being tossed around.
  
  Once rate hikes sober markets sentiments, it will be action time again.

You can read the entire interview here: How the Threat of War is Roiling Commodity Markets.

Since you're interested in commodities, check out Vijay's video where he discusses why 2022 is going to a great year for commodity trading.

Happy Investing!

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Learn more about our recommendation services here...