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Non ferrous metals: Low long-term risks? - Views on News from Equitymaster
 
 
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  • Mar 12, 2009

    Non ferrous metals: Low long-term risks?

    Over the last eight months, the non ferrous metals companies have been among the worst performers on the bourses. Companies like Hindalco, Sterlite and Nalco Industries who are the pivotals in the domestic non-ferrous metals industry have seen their share prices fall by around 68%, 62% and 42% respectively since the beginning of 2QFY09. This has been largely due to the slowdown in the domestic economy and recessionary trend in the developed economy that led to weakening of the commodity cycle.

    Right from the start of the 2QFY09, base metal prices have shown on a continuous declining trend. Aluminium prices have fallen by more than 50% to around US$ 1,300 per tonne whereas copper prices are down by more than 60% to around US$ 3,690 per tonne during the last eight months. The LME prices of both the metals viz. aluminium and copper are trading at their multi year lows. To be more specific, aluminium prices are trading at almost their six year lows, while copper prices are ruling at their four year lows.

    Copper and aluminium prices (LME) exhibiting weakness

    Source: CMIE

    The US economy is grappling with one of the worst ever recessions since the great depression of 1930s. The economies of the European nations and Japan have also plunged into recession. China's economic growth has also slowed down. Thus, all of this put together has weakened the world economy. The above mentioned nations are among the major consumers and producers of the base metals and hence, a massive contraction in demand here, has led to a huge imbalance in supply demand dynamics, thus resulting into inventory buildup. All of this has not augured well for commodity prices, which as mentioned above have exhibited considerable weakness. Situation on the domestic front is not that different from the international markets, economic growth has slowed down leading to lower demand for the base metals.

    The demand for base metals is expected to remain subdued till the time developed economies start recovering. Also, it would be interesting to note when would the impact of stimulus packages announced by various governments all over the world start aiding the demand for these base metals. However, one cannot deny the fact that these measures over a long term basis would have a positive impact on the demand for the base metals. However, over a short to medium term period, commodities will have a gloomy demand outlook. Thus, if you are a long term investor, investing in stocks of metal companies might yield good results over a long period of time. Focus should be on companies, which have a track record of successfully operating during the downturn of a commodity cycle and are not laden with too much debt on their balance sheets.

     

     

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