Not much headroom left base metal stocks

Posted by tjdetai on July 27th, 2015

The prices of base metals––aluminium, copper and zinc––have been surging in the past few months on the back of rising confidence among global investors fuelled by a recovery in the economy. The rise in prices, for these base metals, has been in the range of 20-27% over the last three months. In line with the rise in these commodity prices, stocks of non-ferrous metal companies have also moved northwards. Please see the adjacent chart for details. The non-ferrous equity index, comprising stocks of three major non-ferrous metal producers has clearly outperformed the broader market indices like Sensex, and as well as, the ET Metal Index during the same period. Please refer the second chart for details. While this is good news for shareholders of companies engaged in selling these commodity products, it is time for them to revisit their base metal stock portfolio. In the wake of the recent rally in base metals, a few commodity experts believe that there could be some amount of correction going forward, may be not more than 5-7%, though. Going forward, some of the factors that could determine the movement of base metals are US dollar movements, recovery in US economy and demand from China, among others. If the US dollar remains weak, then the rally could continue further. The decision of the Fed in US and the central banks elsewhere are going to have material impact on dollar movement and consequently on base metal prices. Commodity experts are of the view that in case of a positive impact, the rally, in short term, could be anywhere between 15-20% in the next quarter. What all these mean is that the downside for all base metals are protected and there is a good upside potential. In line with the rally in commodity prices, the stocks of non-ferrous companies like, Hindustan Zinc, Sterlite Industries, Hindalco and National Aluminium Company (Nalco), have also surged upwards in last six months. Barring Nalco, the stock prices of other three companies have risen in the range of 70-100% during the same time period. The higher operating expenses and less than expected earnings in past quarters has made Nalco stock a laggard compared to its peers. But can investors expect same kind of returns over the next six months? The answer is probably no, if one looks at fundamental valuation parameters. The improvement in economy in India and elsewhere creates more optimism for demand of these base metals, used in several industrial applications. The sales volume in second half of FY 10 is likely to grow in the range of 7-12% from what it was in the first half. It means that net sales in second half will be in the range of 20-25% more than first half.

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