India in sweet spot as commodity prices are on uptick

The uptick in prices ranging from steel to wheat could benefit lots of commodity-based companies -- from State-owned SAIL to the agro exporters.

A commodity super-cycle is developing across the globe.

Usually, such an uptrend in prices of commodities has meant bad news for India through inflation and a stress on the balance of payments and consequent downward pressure on the rupee. But this time India seems poised to benefit from the upturn.

One of the key reasons is that crude, which usually leads the charge, is expected to buck the trend. This is good news for India’s oil marketers like Indian Oil and disinvestment-bound Bharat Petroleum Corporation Limited (BPCL).

The uptick in prices ranging from steel to wheat could also benefit lots of other commodity-based companies -- from State-owned SAIL to the agro exporters.

Last year, Indian Oil had a huge problem of surplus. Once the country went into a lockdown from March, the company’s refineries too had to be shut but not before India’s largest oil marketing company was literally using every available space to store oil it could not sell.

Demand for total petroleum products slid 10.8 per cent year-on-year since 1999, according to a Bloomberg analysis. Nine months down the line those stocks have vanished. Indian Oil is now operating at more than 100 per cent capacity, as demand for petroleum products has shot up. The mounting demand is despite the huge spike in prices of petrol and diesel the government has executed.

Although anaemic demand conditions have been reversed, the OPEC-plus group (which now includes Russia) has not managed to change pricing trends. Global crude and gas prices are sluggish, which means the rising demand within the country will not import inflation. This means refining margins for Indian Oil, BPCL and others would remain attractive and help them repair their balance sheets.

Last year, there was debate on whether State-owned BPCL would be able to get a good price when it is disinvested. Its share price dipped by a massive 27.5 per cent in just three months from mid- July to October. By mid-January, those shares have clawed back 12.88 per cent. Similarly, stock market brokerage Motilal Oswal has a strong buy on Indian Oil.

Beyond oil, the other sectors to benefit would be metal companies. A Bank of America score sheet on expected prices of 11 key commodities for 2021 and 2022 indicates price rises for most of them. This includes copper, aluminium, lead and coal.

The reasons are clear. Globally, bond investors are worried about the prospects of a rising inflation, which will erode the purchasing power of their bond portfolios. As central banks in major economies keep providing stimulus through at least the first quarter of 2021 in addition to what they have pumped into 2020, the cost of money is going to remain close to zero (recently, for instance, US President Joe Biden promised a $1.9 trillion stimulus support). It is the huge waves of cash crashing into the world markets that has made nervous investors reach for the safety of scarce commodities as a potential hedge. The supply shortages in different parts of the globe make the hedge more attractive.

Within India, the first commodity sector to turn positive was steel, thanks to rising domestic demand. It is one reason SAIL’s disinvestment was so attractive this month. The retail investor quota of the Rs 2,600-crore offer for sale (OFS) garnered 2.4 times subscription. The institutional investor portion, too, had been subscribed more than two times. SAIL’s share price had languished at about Rs 69.55 since January 2014.

The OFS response was made possible by what Bloomberg called the beginning of a commodity super-cycle in 2021. Shares of most metal companies have rallied, with the Nifty Metal Index hitting a fresh 52-week high last week. The biggest gainers include Tata Steel, which after languishing for years, has added 97 per cent to its price since October last year. S&P has revised upwards its outlook for the stock to “stable”.

Meanwhile, export markets are picking up for copper and aluminium. It is one of the reasons Vedanta has put down the largest bid for the mega Radhikapur West coal block in Angul district of Odisha. The coal block is just 190 km from the company’s Jharsuguda aluminium smelter.

It is true that India will continue to face the consequences of high aluminium production capacity in China. But if the prospect of a lockdown returns to haunt the Middle Kingdom, while India escapes it, both copper and aluminium would see impressive gains. This should help the A V Birla group’s Hindalco and Hindustan Copper, both of which have led the Nifty Metal Index rally since December.

A key reason the upswing in the commodity cycle is likely to help India this time around is the relative performance of the dollar vis-a-vis the Indian rupee. The dollar index has been tumbling in the last nine months from its 17-year high near 104 levels that it saw in March 2020. At the same time, the rupee has appreciated from its all-time low of 77. Brokerages are already pencilling in this appreciation to continue in 2021, too, towards the 70-level since the dollar index is expected to decline further towards 80-level. Thus, imported inflation may not occur.

While a rising rupee ought to dampen exports, especially of agro commodities, the prognosis seems better because of emerging shortages in key producer countries. Easy money combined with the stop-start nature of persisting lockdowns in the world economy means there will be unexpected shortages. One of those could be for wheat, which China has begun to stockpile as Covid-19 cases threaten to surge once again. This is a huge positional shift.

This January, Indian wheat traders secured a 50,000-tonne export order to Myanmar. Myanmar used to import wheat from China.

Exports of grains are likely to be far higher this fiscal, primarily because domestic spot prices have softened. The softness will persist as overall acreage under the crop has risen year-on-year. Already in the April to November period, India’s wheat exports have risen a massive 384 per cent year-on-year.

As goods move briskly, a surprising shortage of containers for shipment has emerged in the Indian market. India’s largest logistics company Concor is scrambling to turn around the long lead time for containers to increase their availability.

So there are lots of reasons for Indian companies to cheer in this commodity cycle.