Metal and Mining Sector:
A mixed bag of good and bad stocks
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.
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.
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