• OUTLOOK ARENA
  • VIEWS ON NEWS
  • APRIL 6, 2004

Commodity exposure

The most talked about phenomenon, till some time back, was the scorching growth of the Chinese economy and its effect on pushing up the global commodity prices. Further, in recent times too, the talk about China has continued, but this time, in a different context. The world now seems to be focusing on the probability of the sustenance of the 8%-9% growth of the Chinese economy and in absence of the same, its effect on global commodity prices, which have single-handedly been driven by the huge Chinese consumption. While the world (read experts ad analysts) continues to have a mixed opinion about the Chinese growth and the fate of global commodity prices, we conducted a poll on our website trying to gauge what our readers think about the same in terms of their investment call towards commodity stocks.

Above is the chart indicating the poll result wherein a majority (43%) of those who voted believed that the prospects for commodity stocks continue to remain promising and they would consider investing into the same at the current juncture. This view was closely followed (39%) by those who would continue to hold onto their investment in commodity stocks, of course on the assumption that the story in commodity stocks is not over yet. A mere 18% were of the opinion that it is time to book profits.

Commodities stocks in sectors like aluminium, steel, nickel, zinc and copper (among others) are all trading near their multi-year highs, thanks to the insatiable Chinese appetite for these commodities. China has emerged amongst the lead consumers of these commodities, which has increased the exposure of many countries (including India) to China in the form of exports. Further, companies across the globe and across sectors have initiated huge capacity expansion plans citing the continuation of the demand from China. However, this 'over-dependence' on the Chinese economy could spell disaster for the global commodity markets if Chinese consumption fails to live up to expectations.

It must be noted that there are already increasing noises that the Chinese economy is over-heated and the government will need to slam the brakes sooner than later. Further, the meteoric rise in commodity prices has started pinching the user-industries of these commodities, as they are unable to pass on the increased costs to consumers owing to high competition. Increased opposition by the user industries against further hike in prices seems more a matter of time than anything else. Thus, we feel that whether the Chinese economy slows down or not, the pressure of increased supply of commodities in the near future is bound to be reflected soon (especially steel).

While it must be noted that predicting commodity cycles is a very difficult task, investors (especially retail) should take utmost caution while investing in these stocks at higher levels. This is because during times of cyclical downturns, stocks of commodity companies, tend to get severely affected owing to fixed costs and their capital intensive nature, which brings along with it huge debt and consequently interest component. Thus, before investing in commodity stocks, investors need to consider certain factors like integration levels of the company, cost efficiency, diversification (across markets and product categories) and the most important of all - valuations.

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 (Research Analyst) bearing Registration No. INH000000537 (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, Canada or the European Union countries, 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 (Research Analyst)
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