Will metal stocks retain shine or erode?

In early 2016 we saw severe deflationary pressures in the global economy and consequently, prices of many metals and resources touched five– to seven–year lows.

For instance, the price of zinc touched five-year low at $1,461 a tonne and copper hit a seven-year low at $4,330 per tonne in January last year. A couple of months prior to that, aluminium price hit six-year low and nickel 12-year low in the global markets.

From these historical lows, metal prices have bounced back a lot – Zinc has jumped 123% to over $3,259 a tonne while other major metals gained anywhere from 43% to 60%.

In the process of this solid rebound in the global metal prices, major metal stocks in India jumped 300-500% from the lows seen in the last two years.

It is already reported that many users of metals like zinc are unable to make any meaningful profits by using the metal in their own outputs. Such booming prices would obviously bring down the profitability of metal users and ultimately hit their demand for metals.

Secondly, many metal producers would start expanding their capacities and outputs to capitalise on this boom. For instance, a global leader in zinc recently announced its plan to ramp up production in South Africa. In the past, most metal down cycles were caused by such significant expansions of capacities and outputs.

Moreover, though the overall global growth is estimated to improve marginally, the economies of China (which happens to be the largest consumer of metals) and India, the fast-growing major economies of the world, are expected to see a dip in their GDP growth rates in the short-term.

International Monetary Fund (IMF) had estimated in July last year that the world GDP would grow at 3.5% in 2017 and 3.6% in 2018 as compared to 3.2% in 2016. However, the Chinese economy, which grew at 6.7% in 2016, is expected to maintain the same level in 2017 and then fall to 6.4% in 2018. The Indian economy, which grew at 8% in FY2016, is expected to see a sharp fall in GDP growth at 6.7% in the current year. India is expected to improve its GDP growth to 7.2% in FY2018, which would be still substantially lower than the growth rates of recent past.

In the last two decades, prices of both metal and metal stocks have remained highly cyclical. In the long-term, they never grew in a linear fashion. Hence, the current peaks of the bull run in the metals and metal stocks have a clear message for reshuffling the concentration of metals stocks in an investor’s equity portfolio.

The writer is founder & managing director, Equinomics Research & Advisory Pvt Ltd