Metals Chocked, Prices Stoked

Published: Mar 15, 2022
Updated: Mar 15, 2022

It’s been a see-saw ride for metals in the last four years. First, metals went through a bearish phase during the US-China tariff stand-off in 2019. Now, the sudden invasion of Ukraine by Russian forces in February has seen metals prices go through the roof, thanks in large part to US and EU sanctions against Russia.

The consequent supply constraints have seen nickel trading at a 10-year high of $ 24,000 per tonne on the London Metal Exchange, while LME copper and aluminium are near their multi-year highs. Inevitably, gold, which was already climbing before the Ukraine war, is seeing a greater rush by investors.

The supply side situation of these metals is bound to worsen as Russian metals producers, in the face of Western sanctions, are being boycotted by global partners and face multiple financial, logistical and trading hurdles. The development has benefited countries like India, Indonesia and Philippines greatly. Metal miners in India are jubilant and prices of their stocks have started climbing up.

Base and industrial metals, which had successfully come out of the bearish trap after being caught in the crossfire of the globally impacting great tariff war in 2019 between the world’s two largest economies – the US and China — and had entered the bull zone in 2021, have soared to new high levels as industrial raw material prices have surged sharply since Russian troops entered Ukraine on February 24, 2022. In particular, commodities such as crude oil, nickel, aluminium, steel, palladium, wheat and sunflower oil have seen prices skyrocketing since Russia is a key exporter of metals, among others, and Ukraine has a significant share in global exports of sunflower oil.

Experts insist that the metals market is bound to react to the Russian invasion of the Ukraine. According to John Mayer, well-known analyst, the EU and US sanctions against Russia will create a global shortage and prices of all metals are bound to go through the roof.

Needless to say, base metals rallied sharply as supply constraints continue to tighten markets. Point out Brian Martin and Daniel Hynes, Australia’s ANZ research analysts, “As the war broke out, nickel led the sector higher, trading at a 10- year high of $ 24,000 per tonne on the London Metal Exchange. The Tagaung Taung nickel plant in Myanmar was halted in January 2022, while tensions over Ukraine are also raising the spectre of disruptions of exports from Russia.”

LME cash copper broke through the $ 10,000/mt barrier earlier in January for the first time in the previous three months before slipping back to close at $ 9,925/ mt. Aluminium ruled above $ 3,000/mt. After the war broke out in February, both metals continued to rule near their multiyear highs amid supply concerns

INVESTOR PANIC

Russia is estimated to hold around 10 per cent of the world’s copper reserves and is a major producer of aluminium. Normick is a major producer of nickel and the platinum group metals, which are key to energy transition. According to ING Economics, Russia currently produces some 43 per cent of the world’s mined supplies of palladium. UBS pointed out that one month before Russia invaded Ukraine, gold prices had risen around 1 per cent year-to-date despite a more hawkish US Federal Reserve, as investors seek safe haven options. At the same time, as very high inflation figures for the UK, Canada and the US were released, gold climbed up by around 2 per cent. The Russian move on Ukraine worsened the situation.

Iron ore and steel prices also rose due to the continuation of the conflict. Ferre is a major Ukraine-based producer of iron ore and pellets.

The Ukraine-Russia war has rocked the London Metal Exchange – the Mecca and epicentre of global trade in industrial metals.

What Russia has termed a ‘special operation’ has broken the LME nickel contract and forced the exchange to impose its core base metals contracts. This led to two crises. The first is the impact on supply from Russia, a major producer of copper and nickel. Even without explicit sanctions, Russian metal exports must now navigate financial, logistical and trading hurdles with lightning speed as more and more companies drop their Russian ties

STOKING BULL PHASE

Industrial metals were already in a bull phase and the war on Ukraine has poured oil on simmering markets, particularly nickel, where the price explosion blew apart the huge short positions held by China’s Singshan group. The second crisis comes from the nickel side. The metal shot up 61 per cent to $ 48,078 per tonne soon after the war broke out, generating massive calls on cash to meet margin calls and threatening what the LME termed a systematic risk to the market with potential multiple defaults among LME brokers.

Though the war is restricted to Ukraine, its impact is already being felt on a global economic scale, pushing up the inflationary price spiral worldwide. Considering that Russia is a leading manufacturer and exporter of copper, aluminium and, of course, nickel, and in view of the US and EU sanctions against the Kremlin, the international supply chain has been rocked, affecting market sentiment in various metals.

BULLISH STEEL

The conflict will impart a bullish fervour to steel. As Russia and Ukraine both are leading steel exporters, the disruption in the supply chain has led to an acute shortage of supplies amidst a rising demand from countries which used to import from Russia and Ukraine. India is among the leading beneficiary countries whose exports have started rising along with the upswing in prices. Steel prices have surged within the first fortnight of the conflict, and Indian hot rolled coils (HRC) have jumped up by around Rs 10,000 per tonne -- a spurt of over 15 per cent. Almost all steel manufacturing companies have started raising prices of various grades. Incidentally, this is a big blow to domestic companies which use steel as their raw material. There is a heavy burden now on domestic companies and they are forced to raise the prices of their products, which is not easily accepted by their clients.

However, export prospects for Indian steel have brightened, as Indian steel makers can get a bigger share of the global markets ceded by Russia and Ukraine, particularly of the European Union, West Asia and North America.

The expected shortfall in global markets because of the Russo-Ukraine war is likely to keep steel prices at buoyant levels at least in the near term. In Europe, steel prices have gone up by around 20 per cent and Indian steel manufacturers are reaping huge benefits. Experts feel that rising demand and excalating prices will encourage steel makers to operate at higher capacity utilizations. Meanwhile, Indian companies using steel as a raw material can think of importing steel from Japan and Korea as there are no tariff barriers on account of India's bilateral free trade arrangements. But Japan and Korea may prefer to look to Europe where higher prices are available.

REAPING BENEFITS

The Indian steel industry is in a bullish frame of mind as Russia's exports of around 32 million tonnes per year in recent times have plunged and the field is open for India to enter. What is more, India steel makers are offering their steel at $ 100 per tonne cheaper and even so are reaping huge profits. Thanks to rising exports and that too at higher prices, SAIL, a PSU which was burdened with a debt of Rs 51,481 crore at the end of fiscal year 2020, has succeeded in bringing down this figure to Rs 19,128 crore by February 15, 2022.

Anil Agarwal, Vedanta supremo, is jubilant at the emerging market situation. Says he, "The geopolitics has completely changed -- first we had the pandemic and now this Russia-Ukraine conflict. Amid all this, I think we are in a sweet spot. We have fewer controversies as most countries are in a good relationship with India."

Of course, the full benefit of the price escalation will not go to Indian steel makers. TV Narendran, Managing Director and CEO of Tata Steel, notes that the crisis has led to an upsurge not only in steel prices but also in prices of raw materials. Coking coal prices have shot up to $ 650 a tonne and iron ore has crossed the $ 150-atonne mark. Not just that, all the other elements that go into steel-making have shot up and so have freight rates. The spurt in input costs has adversely affect the margins of steel makers and has eaten away a part of the price rise in steel.

Experts believe that even if the crisis ends, the market situation will remain buoyant for quite some time.

NICKEL AMUCK

As Russia is a major producer and exporter of nickel, the Putin move to invade Ukraine rocked the 145-year-old London Metal Exchange (LME), the epicentre of the global trade in industrial metals. Nickel was placed around $ 25,000 a tonne. But as the war broke out, the LME nickel contract ran amuck to cross an unprecedented high level of $ 1,00,000 a tonne and reach $ 1,01,365 a tonne on March 8, creating panic in the market and forcing LME to break the contract and impose emergency measures across the rest of its core base metal contracts. Such a drastic step has been taken for the first time in recent years.

According to Fitch Solutions, a Fitch group outfit, what happened on March 8, when the nickel contract jumped to cross $ 1,00,000 a tonne on panicky buying and frantic short covering, was more dramatic but the undertone in the metal is very strong. After the contract was broken, the price came down to below $ 50,000 a tonne and ING Think, the financial and economic analysis wing of Dutch multinational and financial services firm ING, says nickel prices will remain elevated in 2022 even if the war comes to end in the near term. After all, the European Union gets 30 per cent of its nickel imports from Russia. The panic in the global nickel market can be understood as Russia accounts for 9.5 per cent of global mine production and 20 per cent of refined nickel.

According to Fitch Solutions, "disruptions in supplies of nickel are likely to prolong with Russia's output being affected in the short and medium term. Production in Norisk Nickel, which made up 64 per cent of Russia's nickel production in 2020, could be affected due to financial and export issues. Even if the war ends, it would have a medium- term impact on nickel output and metals production elsewhere in the world would increase in response, and nickel prices would remain higher. The post-war situation will be highly beneficial to other producers such as Indonesia and the Philippines."

ALUMINIUM RULES

According to research analysts at leading brokerage house Motilal Oswal, the Ukraine war and the resultant US and Euro- March 15, 2022 Corporate India 35 pean sanctions against Russia will severely impact prices of aluminium, nickel, steel, thermal coal and PC coal positively. As Russia is a commodity powerhouse and a net exporter of many commodities, including metals, the war has brought about another round of turbulence for supply chain problems across the globe.

If the 2020 performance is any indication, Russia was the second largest producer of crude oil and the fourth largest producer of steel, closely behind Japan and India ahead of it. It accounts for 10 per cent of global aluminium exports, around 12 per cent of nickel, 20 per cent of thermal coal exports and 12 per cent of the global steel trade. The sanctions on Russia have started pushing up prices of aluminim, steel, nickel and thermal coal. As India is also an exporter of aluminium, demand for Indian aluminium has started shooting up, pushing up the prices of metal companies like Hindalco, National Aluminium and Vedanta. These companies have started ruling the roost as their exports are on the rise along with the spurt in prices.

STOCKS TO BUY

The Russian invasion of Ukraine has given a big boost to the Indian metal industry and Indian metal companies, particularly Hindalco, Nalco and Vedanta (aluminium), Tata Steel, SAIL, Jindal Steel & Power, JSW (Steel) and Coal India (coal).

Coal India

As Russian gas is not available, several gas-based companies in Europe have slowed down their coal-based power and other plants. Among major countries, Germany has already announced the resumption of several coal-based power plants and the extension of the three nuclear plants for decommissioning in 2022. As a result, coal prices which had turned subdued have started picking up and this will give a big boost to the profits of Coal India. As the rush to fossil fuel-based plants will be delayed, Coal India will emerge a noticeable beneficiary.

FACE VALUE 10, CMP 184.85, 52 WEEK HIGH /LOW 204/123

Hindalco Industries

As aluminium prices have started shooting up in the wake of sanctions on Russia, Hindalco has emerged as a leading beneficiary. The prices of aluminium on the London Metal Exchange have already shot up by around 20 per cent. In view of the spurt in prices of the metal, Hindalco has turned distinctly bullish and the stock price has already shot up.

FACE VALUE 01, CMP 594.65, 52 WEEK HIGH /LOW 624/305

National Aluminium Co.

On account of the US and European sanctions, Rusal, Russia's leading aluminium manufacturing company, cannot export its product. The global prices of aluminium have already shot up and the NALCO stock, which had no takers around Rs 50, is now in demand around Rs 122. According to experts, prospects for the company are buoyant going ahead.

FACE VALUE 05, CMP 122.75, 52 WEEK HIGH /LOW 133/50

Vedanta

Anil Agarwal, supremo of the Vedanta group, is extremely bullish on aluminium in the wake of the Ukraine war. The share price has almost doubled to Rs 378 and chances are that aluminium prices will remain bullish at least for the medium term.

FACE VALUE 01, CMP 401.00, 52 WEEK HIGH /LOW 405/209

Tata Steel

FACE VALUE 10, CMP 1323.00, 52 WEEK HIGH /LOW 1535/681

Jindal Steel & Power

FACE VALUE 01, CMP 491.35, 52 WEEK HIGH /LOW 502/296

Steel Authority of India

FACE VALUE 10, CMP 100.25, 52 WEEK HIGH /LOW 152/67

JSW Steel

Tata Steel prices have shot up 18 per cent, Jindal Steel and Power has climbed up 27 per cent, SAIL has inched up by 12 per cent and JSW by 15 per cent since February 24. Experts believe that in the wake of the East European conflict, steel prices will remain strong as steel prices are catching up with the rising costs. A strong wave of the pandemic in China has once again disrupted the supply chain there and this has benefited Indian steel exporting companies substantially.