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Metal & Mining
Metal & Mining: A Mixed Bag Of Good And Bad Stocks
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The BSE Metal index has already declined by around 70% over the past one year. At the current levels, some of the metal stocks present a good investment opportunity as we believe that the market has more than factored in the bad news. With prices of most of the metals hovering below or near their marginal cost of production, we do not foresee a substantial fall in the metal prices from the present levels. Further, with major stimulus packages being announced by several governments, we expect the demand for metals to improve from the second half of 2009, positively impacting the prices. Thus, with improving demand and a positive price environment, we believe that some of the metal stocks present a good investment opportunity at the current levels.
Metal Prices Trading Near Or Below Their Marginal Costs Of Production:
In the last few months, metal prices have plunged by more than 50% from their highs.At the current prices, most of the metals are trading below or near their marginal costs of production. While the decline in prices has forced a number of high-cost producers to suspend or shut down their operations, large-scale manufacturers have announced a significant amount of production cuts in order to align supply with demand. Thus, we do not foresee a substantial fall in metal prices from the present levels.
Metal |
Marginal cost of production (per tonne) |
Current Price (USD per tonne) |
Aluminium |
2,000 |
1,478 |
Zinc |
1,800 |
1,131 |
Copper |
3,100 |
2,911 |
Stimulus Package To Revive Growth:
With governments around the globe announcing stimulus packages, we expect the global economy to show signs of improvement over the next 3–4 quarters. In the US,president elect Barack Obama has pledged the largest ever new investments in infrastructure development since the 1950s, while the Chinese government has announced a stimulus package of USD 586 bn to be spent on infrastructure. All these initiatives, with a focus on infrastructure development, will help revive the demand for metals. Thus, we expect metal prices to start recovering from the second half of 2009.
Caught In The Economic Cycle Downswing:
The Metals sector is cyclical in nature; the last commodity bull-run, which lasted for six years, saw prices of most of the metals shooting up by more than 100%. While aluminium and steel prices rose by more than 150% during this time period, copper prices jumped by more than 500% on account of the increased global demand, led by the emerging countries such as China and India. The increased demand anticipation has led to a significant capacity addition in the last one year. However, this increase in the production capacity together with a decline in demand due to the global economic slowdown has forced the metal prices downwards, thereby ending the sixyear boom period.