Should You Hold Your Metal Stocks?

Hello, friends am Vijay Bhambwani. I'm a trader since the last 36 years, and through my videos, I want to help my viewers take better trading and investment decisions.

Today's video is specifically about whether you should be holding on to the shares of companies that deal in metals. I have made videos about the metals super cycle, or so it was called till last year. And if you go down in my playlist, you will realise that I have been debunking the supercycle theory, giving you ample number of reasons, some of which I will recap very briefly in this video.

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You see the primary reason for the metal markets to go up, metal prices rather to go up, was cheap and easy availability of unbacked currency, which needed to be invested some place, and after pushing share prices up, commodities, currencies, and bonds, etcetera, were par for the course. It was but natural.

Secondly, the reason why I said this metal supercycle is superficial at best, and it's a creation of the imagination of non-trading experts, was that at Daru Khanna, which is at Masjid Bandar, Mumbai, which is the largest metal scrap dealing market in Asia, I went and talked to a lot of people and they said, Vijay we are not keen on buying scrap metal at all at these lofty prices. We are only interested in selling the accumulated stock which we have purchased over the months, over the years, because we do not that these prices are likely to remain.

So here are doors of deeds who are actually are involved in the trade, who are telling you that these prices are unlikely to hold.

The third reason which I gave you was most of these Latin American countries, which are called LatAm countries, are major exporters of industrial metals. They are up to here in US dollar denominated debt, which is unfortunately rising for them. So their forex loans are becoming untenable, unserviceable, and actually causing a lot of distress in the economy.

Some of these, rather many of these countries, are also net importers of essentials, and that's leading to imported inflation, especially if they are importing fuels. Fuels are multiplier commodities. Transport, food, shelter, clothing, everything becomes expensive if fuel prices go up.

So these countries would have no recourse but to export more of metals to raise cash, which would break the metal prices and therefore, the metal supercycle was on skid row. It was working on banana peels. It was likely to fall. And look at the way the prices of aluminium, copper, lead, nickel, zinc have really gone down pretty badly, and that's a disadvantage for the bulls.

Now, now that we've established that the primary underlined commodity, which is metals, are falling, should you hold on to company shares which deal in these metals. Now here the answer is not just a cut and dried yes, on no. It's a little more complicated than that.

Now there are two types of companies that deal in metals. Number one are the miners. They dig into the earth. They extract these metals and then they sell them. For them, the price of finished products is going to go down, which means lower profits. These companies' shares are not really good buys.

Then there are other companies that consume metals. For them, metals are raw materials. For them, the raw material prices are likely to come down. Initially with the meltdown or the mini meltdown rather, in the stock market, even those companies' shares will fall.

But they will recover faster because sanity will prevail and people will say, hey, look, these guys do deal in metals but they are not extractors or miners of metals. They're consumers and raw material prices are going down and their profitability is going to go up. So let's buy their shares.

Now I am not making a buy or sell recommendation. I'm giving you a hypothetical example. Let's take aluminium because aluminium has collapsed more than Rs 100 from its recent peaks and that means over a 30% decline in price.

On one hand you have Hindalco, which is a mining company. It digs in to the ground, extracts aluminium, and sell that in the market. That is going to make lesser profits. On the other hand, is TTK Prestige. It makes those pressure cookers. You know, the TTK Prestige Jingle, 'Jo biwi se kare pyar, wo Prestige se kaise kare inkar?'

These guys actually buy aluminium to make pressure cookers and other home utensils and appliances. For them, the raw material prices are going to go down. I repeat again, this is not a buy or sell recommendation. I'm merely trying to illustrate my thought process based on my 360 degree world view, which I employ to take trading and investment decisions.

Which one of these two companies would you rather buy? Hindalco, for whom aluminium is the finished product, or TTK prestige, for whom aluminium is a raw material? Obviously, you would want to buy the stock of a company, which is likely to benefit from falling prices, all other factors remaining constant.

I'm not giving you examples of the profitability or other aspects. This can't be the only aspect that you take before buying a stock. Like I said, it's just an illustrative academic example.

So should you hold on to your metal stocks? You should hold on to those companies which will be consuming metals. If those companies are actually mining, refining, smelting or selling metal as a finished product, I am afraid you're not exactly in for good times.

Now somebody would ask me, Vijay, prices of Hindalco, Tata Steel, Jindal Steel, etcetera, etcetera have really, really fallen hard and fast. Do you think declines are still in the offing?

Now at the risk of making myself unpopular with my viewers, I am in the business of staying profitable, not in the business of staying relevant, so I have been told before about saying unpopular things like metals are not going to see a super cycle, so go ahead and make my day.

So should we not hold on to these companies because the falls have been too much? Let me assure you of one thing. You and me are nobody to say that the fall is done, it's too much, a bottom has been reached. Let Mother Market tell us that the market bottom has been made and using statistical data, know where the weight of evidence is emerging that bottoms have been made.

So should you hold on to your metal stocks? Like I said, consumers, yes, producers, no. Let's be careful out there. More videos in the coming days. Till I meet you in my next video, this is Vijay Bhambwani signing off for now, not before reminding you to click like on this video, if you like what you saw.

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Thank you. Have a very, very profitable day. Bye.