There is a broad-based rally in global commodity prices as economies open up and huge fiscal and monetary stimuli in developed countries spur infrastructure and job creation.
Two months ago, Goldman Sachs said that the rally was the just the first leg of a bull run and the rise in prices has only continued.
According to Reuters data, tin, and copper have rallied 20-50 percent so far in 2021. Brent Crude has rallied nearly 30 percent. In the precious metal space, Palladium rose over 20 percent, followed by Platinum (up 12 percent), and Silver (up 4 percent). Gold is flat for the year at current levels.
Apart from the surge in demand, there are supply concerns as commodity producers curbed capacity expansion over the last several years because of low prices.
“As the US and Chinese economies continue to recover, and stimulus plans target infrastructure and renewable energy in both countries, consumption of metals will continue to increase,” said DK Aggarwal, CMD of SMC Investments and Advisors said.
Moreover, ultra-loose monetary policy from developed country central banks and a weak US dollar have also supported the rally in commodity prices.
“The availability of sufficient liquidity in the system directly affects the commodity prices,” said Ravi Singhal, Vice Chairman, GCL Securities Ltd said. “The commodity demand traction is not only healthy from China but also across the world.”
In India, shares of commodity producers have cleared benefitted. Hindalco, Tata Steel, ONGC, Reliance Industries, Vedanta, JSW Steel, JSPL, SRF, Laxmi Organic, Ultra Tech Cement, ACC, Tata Chemical, Pi Industries, and UPL, among others, have rallied.
“Commodities are building blocks of every economy. Commodity investments can help diversify portfolio into a different asset class apart from shares and enhance the overall returns of investments,” said Aggarwal.
We spoke to various experts on how investors can play the commodity theme and here’ what they recommend:
Expert: Divam Sharma, Co-founder at Green Portfolio Services
The company is into coal tar pitch and calcined petroleum coke which enjoy the tailwinds of a huge upsurge in prices. It is also in the business of cement and speciality chemicals. The company reported a PAT of over 206 crore in Q4FY21, almost doubled from the year-ago period.
The company offers a diversified play into zinc, copper, aluminium, oil and gas, iron ore, copper, and steel. The company reported a Q4 PAT of over Rs 6,400 crore, compared to loss reported in the year -ago period. The company enjoys tailwind from the surge in commodity prices across segments.
The company is into steel and power. It continues to deleverage its balance sheet which is a positive sign. JSPL reported manifold jump in the consolidated net profit of over Rs 1900 crore with improvements across steel, power, and overseas mining operations. The company is planning to become net debt-free company in near future.
Strengthening the balance sheet has resulted in consolidated net debt declining further by Rs 3,475 crore in the fourth quarter and Rs 13,773 cr in (full) FY21. As of March 2021, JSPL reported consolidated Net Debt of Rs 22,146 crore.
DK Aggarwal, CMD of SMC Investments and Advisors
The company is doing well and improvement in OPaL (ONGC Petro additions Limited) performance, consolidation of downstream entities OMPL-MRPL-HPCL and subsequent synergies, entry into gas marketing (a clean energy sunrise sector) and GST in gas would propel its financial growth.
Moreover, management expects demand for crude oil to rise from the strong consumption growth in petroleum products and prices are expected to firm up sharply. We are also expecting exploring and other activities to benefit from free pricing, strong demand and stabilising capacity additions
The company has positioned itself for strategic diversification and has witnessed continued profitable growth. It is diversifying into steel making and has undertaken several capital-intensive projects to modernize and increase capacities to retain its domestic leadership and has also forayed overseas successfully.
The government of India has charted a road map to augment India's steel production capacity in near future. To fulfill this vision, NMDC proposes to act as a facilitator and developer of greenfield steel plants by creating Special Purpose Vehicles (SPVs) in the mineral-rich states of Jharkhand and Karnataka.
With the focus on seizing opportunities, the company has geared up to service rising steel demand in the market as soon as the gradual opening of lockdown started.
The consistent growth reflects that SAIL is poised to grow steadily in the future. Domestic steel consumption has a positive outlook as the economy is reviving and all sectors have started to pick-up.
The company operates with an asset-light business model. It has a strong geographical presence in more than 80 countries with superior sourcing capabilities and established access to cost-competitive manufacturers in China and India.
The asset-light model allows the management to focus on the identification of generic molecules and registration opportunities, preparing dossiers, and securing registrations for formulations and generic active ingredients.
The company will continue to benefit from its healthy market position, robust operating efficiency and strong liquidity. However, the company expects the government’s push towards big infrastructure projects and affordable housing to help the industry to come back on the growth trajectory.
There could be a lot of pent-up demand for cement, which would lead to a sharp recovery in volumes once the nationwide lockdown is lifted and normalcy returns.
Devarsh Vakil, Deputy Head of Retail Research, HDFC Securities
Gujarat Gas & GAIL:
Increasing gas supply from domestic sources should drive earnings growth and valuations for the Indian gas utilities, especially the gas transmission companies.
The KGD6 consortium has commenced gas production from R-cluster, an ultra-deepwater gas field in December 2020.
The production from Satellites Cluster and MJ field is expected to start by mid-CY21 and CY22 respectively. Peak gas production from the three fields is expected to be around 30mmscmd by CY23.
ONGC has commenced gas production from KG-DWN-98/2 in March-20. It is expected to reach 3mmscmd in FY22 and further ramp up to 15mmscmd by FY24.
This increasing gas supply from domestic sources should drive earnings growth and valuations for the Indian gas utilities, especially the gas transmission companies.
We expect a 16 percent CAGR in gas supply from domestic sources and a 12 percent CAGR in Indian natural gas demand over FY21–23E to drive earnings growth CAGR of up to 25 percent (FY21– FY23E) for our top picks Gail and Gujarat Gas (GGL).
Owing to an expected recovery in demand for petroleum products and, subsequently, improving refining margins and reasonable valuations.
Atish Matlawala, Sr Analyst, SSJ Finance & Securities
Tata Steel is the largest steel producer in India with a capacity of around 19 MTPA in India and 12 MTPA in Europe. The company is focused on increasing its total capacity to around 40 MTPA over the next 3-4 years.
FY21 was a great year for Tata steel in which it has reduced its debt by around Rs 29,000 crore but still has around Rs 75,000 crore of debt.
We believe with steel in a strong up cycle, the company will be able to post strong numbers over the next 2 years at least. We are positive on the company for the short to medium term and have a price target of Rs 1,500 in the next 12 months.
Hindalco is a leading player in aluminium and copper having operations in 10 countries. Consumption of aluminium is increasing in the automotive industry which augurs well for the company. The government’s push on rail electrification, Metro network & high-speed railways is expected to drive significant demand for Copper alloys in catenary wire systems.
We expect Hindalco to benefit from both volume and value growth. We are positive on the company for the short to medium term and have a price target of Rs 600 in the next 12 months.
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