12/1/2015

TheEconomicTimes
Title:WHATTHECOMMODITYCRASHMEANSFORYOU
Author:NARENDRANATHAN
Location:
ArticleDate:11/30/2015
Globalcommoditypriceshaveplummetedtorecordlows.Here'showyoucansafeguardyourportfolio.
Commoditieshavebeenwitnessinganearcatastrophicfallforquitesometimenow.Theslidethatbeganin2008hasremainedlargelyunchecked,
barringasmall`reliefrally'in201112.CommoditiestrackerBloombergCommodityIndexhasfallen65%fromits2008peak.Itisjust8%shyofa
25yearlowreachedin2009.Expertsreckon,beforethemarketstabilises,commoditiescouldevengobelowthe2009pricelevels.
Theglobaleconomicslowdown,particularlyinChina,hasbeenpullingdowncommodityprices.GlobalcommoditypricesarelargelydrivenbyChina
andthecountry'sshiftfrominvestmentledgrowthtoconsumptionledgrowthistakingtime,saysSuhasHarinarayanan,HeadofResearch,JM
Financial.Also,evenastherehasbeensomerecoveryintheUS,boththeJapaneseandtheEuropeanUnioneconomieshavestartedslowing.This
explainswhytheBalticDryIndex,whichtracksbulkcargorates,hasfallen96%fromits2008peak,tohitanalltimelow.
Thecostofproductionofseveralcommoditiesisalreadywellabovetheirmarketprices.Capacitiesarealsobeingshutdown.Inthepastoneyear
alone,therehasbeena65%fallinthenumberofoilrigsintheUS.Also,thefearofanimpendinginterestratehikebytheUSFederalReservehas
contributedtothecrash.
However,expertsreckon,thefallcouldendaroundDecember.GlobalcommoditiesmaybottomoutaroundthefirstUSFedratehike,itslike`buyon
rumor,sellonnews'thepersistentpressureoncommoditiesislikelytoeaseoncetheuncertaintypertainingtoFedactionisbehind,saysNavneet
Munot,ChiefInvestmentOfficer,SBIMutualFund.
Impactoneconomy
Thebroaderstockmarketindicescontinuetobeunderpressurebecausetheycompriseseveralweakcompaniesfromthecommoditysector.Inthepast
oneyear,theNSECommodityIndexhasunderperformedtheNiftyby9%.Thoughlate,stockexchangeshavestartedtakingcorrectiveaction.The
BSEhasdecidedtosubstituteHindalcoandVedantaintheSensexwithAsianPaintsandAdaniPorts.Afterthechange,on21December,TataSteel
willbetheonlymetalcompanyleftintheSensex.
Fundamentally,eventhoughthecrashhasapositiveimpactonIndia,unlikeemergingmarketeconomiessuchasRussiaandBrazil,thecountryhas
seenfundoutflowsduetoinvestors'herdmentality.Also,thecommoditycrashhasshakenthebudgetsofseveralcommodityexportersinWestAsia,
forcingtheirsovereignwealthfundstosellIndianequities.ForseveralWestAsiancountries,thebudgetbreakevenisifcrudeisbetween$60and
$80,andtorecoupthebudgetdeficit,sovereignwealthfundsfromcountrieslikeSaudi,KuwaitandQatararesellingIndianstocks,saysV.K.
Vijayakumar,InvestmentStrategist,GeojitBNPParibas.
However,asIndiaisanetimporterofcommodities,atanaggregatelevel,thecountrystandstogainfromthecrash.Indiawassendingmoneyoutside
forbuyingcommodities,anditusedtocomebackasportfolioinvestments.Now,savingsintheimportbillwillmorethancompensateforthedecline
ininvestments,saysMunot.
Also,thegovernment'sstrategyofretainingpartofthemassivefallincrudepricestherehasn'tbeenacommensuratefallinretailoilpricesshould
provideitwithamplefundstoincreaseinfrastructurespendingandboosttheeconomy.Sinceprivatesectorinvestmentisnothappening,government
spendingisneededtospeeduptheeconomicgrowth,saysVijayakumar.
ThefallininflationduetothecrashincommoditypriceshasallowedtheRBItogoaheadwithinterestratecuts.Ratesensitivesectorsshoulddo
wellforthenext12years,saysVineetToshniwal,ManagingDirector,EquirusCapital.Theratecuthasalsohelpedcompaniesreducetheirinterest
burden.Theoverallcostpressureshaverecededforthecompanies,sothereisscopeforfurthermarginexpansion,saysMunot.
Stockinvestors
Sincecommoditypricesarenotgoingtoseeasuddenrecovery,investorsincommoditystocksneedtobeextracautious.Industrialmetalssuchas
steel,aluminium,copper,zinc,etc.areamongtheworstaffectedcommodities.Thoughthegovernmenttriedtoprotectthemetalsindustryby
imposingantidumpingduties,thisisjustatemporarymeasure.
Also,thegovernmentcannothikethedutiesanyfurtherasantidumpingdutiesarenegativelyimpactingthemetalusers'segmentauto,
engineering,etc.Giventhecrashinthemetalscounters,shouldinvestorsgoforbottomfishingnow?Expertsanswerinnegative.Betterstayaway.
Don'ttrytocatchafallingknife,saysToshniwal.
Thissituationofthemineralssectorisalmostthesameasthatofmetals.Priceshavehitrockbottom.However,incontrasttometals,thereareexperts
whoaregettingbullishonsomeofthemineralcompanies.Indiancommoditystocks,especiallythePSUs,havebecomeadividendyieldplaynow,
saysHarinarayanan.CashrichcompaniessuchasNMDCandCoalIndiaareofferinghighdividendyieldandmaycontinuetodosoastheyhaveno
majorcapacityexpansionplans.Also,thegovernmentmayextractmoredividendinthecomingyearstomeetitsfiscaltargets.Theoilandgassector
isamixedstory.PrivatesectorupstreamoilcompaniesthoseinvolvedinexplorationandextractionsuchasCairnIndia,haveseenadirectfallin
theirnetprofit.TheimpactonpublicsectorcompaniessuchasONGC,hasbeenlimited.Thisisbecausethefallinoilpriceshasbeenaccompanied
withafallintheirsubsidyburden.ThoughPSUoilmarketingcompanies(OMCs)suchasIOCreportedalossinthelastquarter,itwasmostlyon
accountofexpensiveinventory,whichisshortterminnature.Withrefiningmarginsremainingrelativelystable,expertssay,OMCsarebetterplaced
nowthanupstreamoilcompanies.Thereisnotmuchclarityonupstreamsubsidyburdensharing,saysHarinarayanan.
Overtheyears,theincreaseduseofethanolasautofuelhaslinkedthepricesofsugarandcrudeoil.Andso,thefallincrudeoilpriceshaspulleddown
globalsugarpricesaswell.PopulistpoliticsinIndia,however,hasn'tallowedsugarcanepricestofallproportionately.Withthecostofproduction
wellabovethesellingprice,Indiansugarcompaniesarenowstrugglingforsurvival.Sugarcompaniesarefacingbigproblems,andifthingsdon't
change,theymaygoforbankruptcy,saysVijayakumar.
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Amongcommodityproducers,cementcompaniesaretheleastimpacted.Theyareproducingdecentprofits,despitealowcapacityutilisationofaround
70%.Expertssaythatcementisagoodsectortobeinforthenext23years.Ifthecapacityutilisationincreasesfromthepresent70%to80%,dueto
theinfrapush,theprofitabilityofthecompanieswillincreasesignificantly,Vijayakumar.However,giventhesizeofthecountry,investorsneedto
seethelocationofthecementcompaniesbeforeinvesting.Currently,prospectslookgoodforcementproducers,barringthoseoperatinginSouth
India,saysHarinarayanan.
Evenascommoditymanufacturershavebeenfeelingtheheat,commoditydependentcompanieshavebeenenjoyingthebenefitsofthefallin
commodityprices.Theyhavestartedreportingdecentprofits.Sectorssuchasaviation,oneoftheforemostbeneficiariesofthefallincrudeprices,is
witnessingincreasinginvestorinterest.Despiteaslowdownindemandgrowth,crudebasedrawmaterialusers,suchaspaintmanufacturers,have
shownincreasedprofits.FMCGisanothersegmentthathasshownmarginexpansion.Sincesyntheticrubbercanbemanufacturedfrompetroleum
waste,crashincrudepriceswasaccompaniedbyafallinnaturalrubberprices,helpingtyrecompaniestoreportbumperprofits.But,thispartywillnot
lastforever.CrudeoilpricesstartedcomingdownfromNovember2014,helpinggrossmarginexpansionforFMCGandtyrecompanies.Thisbenefit
willstartwaninginthecomingquarters,saysHarinarayanan.Sincemetalpricescrashedafewquartersafterthefallincrude,itspositiveimpacton
autoandautoancillarysectormaycontinuefortwomorequarters,sayexperts.
MutualfundinvestorsInvestors
needtobecarefulaboutmutualfundswithahighexposuretothecommoditysector.Givenmostsuchfundsareindexfunds,there'slittlefund
managerscando.DedicatedcommodityorthemefundssuchasSBIMagnumCommaFund,MiraeAssetGlobalCommodityStocks,UTIEnergy
Fund,etc.alsohavelimitedalternatives.Now,theirstrategyistostayawayfromweakcommoditysectors,suchasmetals,andinvestmoreinto
reasonablystablesectors.Relativetothecommodityindex,ourfunddidwell,duetosignificantunderweightinmetalsandoverweightinsectorssuch
ascement,agrochemicals,oilandgas,etc,saysMunot.
Directcommodityinvestors
Allinvestiblecommoditiesareinabearphase.AndthismaygetworseinthecomingdaysclosetotheratehikebytheUSFederalReserve.While
theinternationalgoldpricesmaygodownto$950$975pertroyounce,silverisexpectedtofalltoaround$12.5pertroyounce,saysPritiGupta,
ExecutiveDirector,AnandRathiCommodities.However,thefallinpricesinIndiamaybenotbethatsteepbecauseofapossiblerupeedepreciation.
Still,sincethepricesarelikelytofall,thereisnoneedtorushnowtoinvestingoldorsilver.Itwilldoinvestorswelltowaitforawhile.Goldand
silverpricesareexpectedtofallto`24,300per10gmand`30,000perkgrespectively,saysGupta.
Evenwhenitcomestobuyingornaments,buyersshouldconsiderplatinuminsteadofgold.Internationalplatinumhascrashedmuchmorethangoldin
thelastoneyearandisnowplacedata22%discounttogold.Thishashappenedbecauseplatinumisalsousedasanindustrialmetalindiesel
vehicles.However,platinumbuyersshouldnotethatthemakingchargesarehigh,comparedtogoldandsilver.Sinceplatinumcannotbemeltedat
localjewellerystoresandremadeintonewornaments,itsresalevalueisalsolesscomparedtothatofgoldandsilver.
Pleasesendyourfeedbacktoetwealth@timesgroup.com

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