Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2017 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.

Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
Commodities: A mixed bag! - Views on News from Equitymaster
  • E-MAIL
  • A  A  A
  • Dec 28, 2006

    Commodities: A mixed bag!

    The commodities sector witnessed mixed sentiment during 2006. Those who shifted to cement sector from metals would have been a happier lot. The stocks within the cement sector outperformed the Sensex while select metal stocks performed well. Thus, unlike the cement sector, returns from the metal stocks were subject to good strong picks. To give a perspective, an amount of Rs 100 invested in the commodities index would have yielded 33% return by the end of the year, while the returns would have been higher at 44% if invested in BSE-Sensex, the benchmark index. Till May 2006, the commodities index heavily outperformed the benchmark index. It has been a downward slide since then and as the year draws to a close, it currently stands a tad lower.

    Our 2006 assumptions Vs reality
    Aluminium: With the Chinese economy not showing any signs of cooling off, the demand for metals continued to outpace supplies. In 2006, the world supply and consumption of aluminium grew by approximately by 7% YoY and 5% YoY respectively, which was primarily a factor of the Chinese demand for the metal. Strong demand from China and simultaneous improvement in economies like the US and other Asian economies added to the strength in global aluminium prices. Favourable demand-supply dynamics in the industry led to the further firming up (around 30% YoY) of average aluminium prices in FY06. The effect of improved realisations was reflected in the continued robust performance of the companies in the last few quarters. The situation was similar in the case of copper, zinc and lead where prices have soared on account of depleting stockpiles and sustained demand.

    Steel: The steel industry is fragmented and faces excess supply situation. The additional supplies during 2006 was a factor of the significant ramp up in production by China, which led to the country reducing its dependence on imports and thus additional steel continued to find its way to other markets. The western markets remained the key consumption centers in 2006 and the growth in end user industries like automobile helped stabilise prices. Though the steel prices witnessed recovery on YoY basis, they remained volatile. Volatility in steel prices witnessed in recent past was not on account of a sudden drop in demand but due to an inventory overhang situation created in the market. The industry has witnessed M&As in recent past and still more are expected to occur in the coming future. The biggest merger in terms of value and volume was the coming together of Arcelor-Mittal, two of the world’s largest steel players. Consolidation of capacities has emerged as the only solution to counter the over supply situation, that invariably leads to falling realisations.

    Cement: The going never has been so good for the Indian cement industry in the past. With cement prices having ruled firm on the back of a favourable demand-supply scenario (up by almost 30% during 9MCY06), cement manufacturers benefited significantly. Floods that hit the western parts of the country in mid-2006 hardly had any impact on the sector’s growth on account of robust demand that grew at the rate of around 10% YoY.

    Outperformers and laggards

    Non ferrous metals: The zinc sheen…
    Company 22-Dec-05 22-Dec-06 % change
    BSE-Sensex 9,257 13,470 45.5%
    BSE METALS 6,349 8,838 39.2%
    HIND. ZINC 237 830 250.1%
    MALCO 223 387 73.7%
    HINDALCO 140 171 22.1%
    NALCO 222 212 -4.5%
    INDIA FOILS 14 8 -44.5%

    Aluminium: The fact that the valuations at the start of 2006 had already captured the future prospects, the continued buoyancy in the sector failed to reflect in stocks. The metal prices remained a bit volatile during the year on account of greater linkage to international prices. Hindustan Zinc gained a huge 250% and emerged as the lead gainer, mainly on account of a strong spurt in international zinc prices.

    Steel: Not so impressive
    Company 22-Dec-05 22-Dec-06 % change
    BSE METALS 6,349 8,838 39.2%
    SAIL 54 82 52.2%
    JINDAL STEEL 1,528 2,161 41.4%
    SESA GOA 1,045 1,385 32.5%
    TATA STEEL 369 448 21.3%
    ESSAR STEEL 40 34 -16.0%

    Steel: It must be noted that the performance of companies in the segment of value-added products was better. As far as SAIL is considered, it benefited during the year on account improved physical performance and merger with IISCO. The reduction in costs is anticipated as the company has outlined plans to acquire stake in coal based mines abroad to reduce dependency on imports.

    Cement: The ouperformers
    Company 22-Dec-05 22-Dec-06 % change
    INDIA CEMENTS 94 232 146.3%
    ULTRATECH CEMCO 433 1,040 140.2%
    MADRAS CEMENT 1,504 3,235 115.1%
    GRASIM 1,333 2,713 103.5%
    ACC 540 1,048 94.0%
    GUJ. AMBUJA 81 137 69.1%

    Cement stocks logged in robust gains in 2006. Favourable pricing environment and improved demand supply equation helped these companies report outstanding performance. Performance of Grasim, the diversified major, also got a boost on account of buoyancy in its other business like VSF.

    What to expect in 2007?
    In 2007, world aluminium consumption is forecast to increase by approximately 5% YoY. Asia will continue to be the high consumption growth area led by China, which has been and is expected to continue to register double-digit growth rates in aluminium consumption in the medium-term. However, with reduction in import duties, domestic realisations of aluminium majors, namely Hindalco and Nalco, are likely to be under pressure, as the buffer on international prices is reduced. Moreover, with greater linkage to international prices, volatility in financials could increase. However, producers are moving downstream to negate the higher volatility.

    As far as our view on the steel sector is concerned, we believe that the threat of additional supplies of steel exercising pressure on prices will continue in 2007. Though steel prices were volatile in 2006, they witnessed recovery on a YoY basis, due to which many players have announced capacity addition plans for the next few years. The current government stance of allowing mining lease to those who will be a part of the development of the state has been another factor for large capacity announcements. With consolidation hotting up and foray into newer and developed markets, companies are expected to enjoy better realisations in the medium term. From a long-term standpoint, the demand in India is not sufficient to absorb the increased supply and hence for an improved and consistent demand supply equation, India needs to ramp up its exports.

    In case of cement, we believe that the current good times will continue in the medium term. The demand for cement has increased at the rate of 10% annually on account of buoyancy in the end user industries. Going forward, the sector is expected to continue to grow at the same pace, and with the industry operating at near full capacity, most of the players have lined up capacity expansion plans. Once these capacities become operational, the industry may face excess supply situation, which in turn might impact margins. In 2007, we expect improved realisations for cement players on account of improved demand supply equation. However, towards the end of the year, the same (realisations) are expected to stabilise as new capacities become operational.

    Also, it must be noted that while the stockmarkets may be positive on commodity stocks in light of ‘lower’ price to earning multiples, it has to be borne in mind that these multiples for commodity stocks tend to be lower when the pricing environment is favourable, like it is now.

    To read our thoughts on year 2006 and our view for 2007, click here - Reflections 2006.



    Equitymaster requests your view! Post a comment on "Commodities: A mixed bag!". Click here!


    More Views on News

    Tata Steel: A Strong Quarter (Quarterly Results Update - Detailed)

    Aug 12, 2017

    Tata Steel reported a robust operating performance on the back of strong domestic and European operations.

    SAIL: Loss at EBITDA Level Due to Higher Raw Material Cost (Quarterly Results Update - Detailed)

    Jun 12, 2017

    The company registered a negative EBITDA of Rs 2.64 billion during the quarter. This is on the back of an increase in raw material prices.

    Tata Steel: Strong Quarterly Performance (Quarterly Results Update - Detailed)

    May 22, 2017

    Tata Steel reported a robust operating performance on the back of strong domestic and European operations.

    SAIL: Pressure Continues. Loss at Operating Levels... (Quarterly Results Update - Detailed)

    Feb 15, 2017

    SAIL has reported a 26.2% YoY increase in the topline while the bottomline reported a loss of Rs 7.94 billion.

    Tata Steel: Loss from Discontinued Business Mars Performance (Quarterly Results Update - Detailed)

    Sep 27, 2016

    Tata Steel has reported a 6.3% decline in the topline while the bottomline was in red in 1QFY17.

    More Views on News

    Most Popular

    Demonetisation Barely Made Any Difference to Tax Collections(Vivek Kaul's Diary)

    Aug 7, 2017

    The data tells us quite a different story from the one the government is trying to project.

    A 'Backdoor' to Multibaggers: It's Like Investing in Asian Paints Ten Years Ago(The 5 Minute Wrapup)

    Aug 10, 2017

    Don't miss these proxy bets on growing companies or in a few years you will be looking back with regret.

    Should You Invest In Bharat-22 ETF? Know Here...(Outside View)

    Aug 8, 2017

    Bharat-22 is one of the most diverse ETFs offered so far by the Government. Know here if you should invest...

    Signs of Life in the India VIX(Daily Profit Hunter)

    Aug 12, 2017

    The India VIX is up 36% in the last week. Fear has gone up but is still low by historical standards.

    7 Financial Gifts For Your Sister This Raksha Bandhan(Outside View)

    Aug 7, 2017

    Raksha Bandhan signifies the brother-sister bond. Here are 7 thoughtful financial gifts for sisters...

    Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
    Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement.

    LEGAL DISCLAIMER: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

    SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

    Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
    Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407

    Become A Smarter Investor In
    Just 5 Minutes

    Multibagger Stocks Guide 2017
    Get our special report, Multibagger Stocks Guide (2017 Edition) Now!
    We will never sell or rent your email id.
    Please read our Terms


    Aug 18, 2017 (Close)