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Does Price Recovery Signal a Revival For Metal Stocks?

Are metals out of the trough or will the slump continue?

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Published 4 years ago on Apr 27, 2016 Read

Neelkanth Mishra, India equity strategist, Credit Suisse

Commodity prices have rebounded from 25-year lows hit in January 2016 and prices are up for most large commodities. Previously, the rebound fizzled out in April-May because of weak seasonal demand. But that seems unlikely this year due to three reasons. First, the DXY (dollar index spot) weakness will help stabilise cost curves. Second, the Chinese policy focus has turned from supply-side reform to demand stimulation at least in the short term. And third, as prices stabilise or rise marginally, re-stocking should start, boosting aggregate activity levels. Moreover, the pick-up in global industrial production should alleviate concerns of an imminent deep global recession and improve risk appetite. Other feared fault-lines such as the risk of a sharp RMB depreciation have also faded since February 2016. All these factors warrant a tactical change, which is why we are switching to ‘overweight’ on metals.

Sudip Bandyopadhyay, managing director, Destimoney Securities

The rally we are seeing right now is a short-term phenomenon. Fundamentally, nothing has changed in the metals space and the global outlook continues to be grim. In fact, the whole boom was propelled by unusual and abnormal demand in China. There are no signs of that kind of demand coming back from China or anywhere else in the near future. And unless that happens, we won’t see a sustained rally in the metals space. So, investors should be extremely cautious before touching metal stocks. Besides, the debt-burden of some of these companies is a cause for concern. If the near-term prospects of any industry are looking good then the debt doesn’t matter, in fact it can help improve returns. But if the fundamentals of industry and the demand scenario are not anything to write home about, the debt burden can be like a death knell. This is especially true for metal companies.

 

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