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Commodities 2003: Proving mettle - Views on News from Equitymaster
 
 
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  • Dec 24, 2003

    Commodities 2003: Proving mettle

    The year 2003 was a great year for investors all round the world, India being no different. The Indian stock markets had a dream run in 2003 on the back of structural reforms taking place in the economy and the improving performance of India Inc. Amidst all the euphoria on the stock markets, there were some sectors/stocks that outperformed the benchmark indices while some others, which failed to match the gains witnessed on the bourses.

    Commodities (aluminium/steel) were witness to huge gains on the back of improved performances of companies owing to strengthening of metal prices. Just to put things in perspective, while aluminium prices rose approximately 15% in 2003 (until December 10, 2003), average steel prices registered a jump of nearly 12%-13% in the last one year. So, what caused this huge leap in metal prices in the international markets?

    Aluminium
    (Rs) Price on
    Dec 31, 2002
    Price on
    Dec 10, 2003
    % change
    SENSEX 3,377 5,286 57%
    MADRAS ALUMINIUM 53 204 286%
    HINDALCO 586 1,292 120%
    NALCO 93 167 81%
    INDIA FOILS 7 11 53%
    INDAL 115 160 39%

    Demand for major commodities like zinc, copper, nickel etc., by China drove prices of commodities to sky-high levels owing to the quantum of consumption in the region. The country's insatiable demand for metals, including aluminium/steel, has been supporting the high prices in the international markets. The Chinese demand has been on the rise owing to huge infrastructure spending by its government. Moreover, with the Chinese economy continuing to power ahead with GDP growth rates in excess of 8%, the demand for white goods and cars has also been on the rise.

    Steel
    (Rs) Price on
    Dec 31, 2002
    Price on
    Dec 10, 2003
    % change
    SENSEX 3,377 5,286 57%
    SESA GOA 69 536 680%
    JINDAL IRON 59 250 325%
    SAIL 10 42 312%
    JINDAL STEEL 349 951 173%
    ISPAT INDUSTRIES 6 14 150%
    TISCO 152 368 143%
    ESSAR STEEL 9 23 142%

    As can be seen in the two tables above, the stock prices have zoomed in both the sectors under consideration here. While the primary driver in the aluminium sector was the increase in volume sales on the back of increased capacities by the players, for the steel sector, improving cost efficiencies was the primary reason. The benefit of falling interest rates benefited both the industries but it was a far greater boon for the ailing steel industry, which had accumulated huge debts on its books owing to the 2 year lean period witnessed during 2001 and 2002. Efforts at debt restructuring also helped steel companies to turnaround their fortunes and come out of the trough.

    What to expect?

    Going forward, we feel that aluminium prices will continue to rule strong (though some amount of consolidation at lower levels cannot be ruled out owing to the huge spurt in prices) and demand is unlikely to subside considerably in the near future owing to the strong support from China (second largest consumer of aluminium in the world). However, at current valuations, on price-to-earnings basis, most aluminium stocks are trading on the higher side of their historical valuation spectrum and much of the FY04 expectations seem to have already been factored in current stock prices. As far as our take on the steel sector is concerned, having provided extra-ordinary returns to investors over the last 7-8 months, much of the future performance currently seems already factored in valuations. In our view, it is advisable to exercise utmost caution towards steel stocks and beware of any signs of a turn in the steel cycle (downwards).

     

     

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