what the commodity crash means for you

12/1/2015

http://epaperbeta.timesofindia.com/Article.aspx?eid=31818&articlexml=WHATTHECOMMODITYCRASHMEANSFORYOU30112015102005 1/8

TheEconomicTimesTitle:WHATTHECOMMODITYCRASHMEANSFORYOUAuthor:NARENDRANATHANLocation:ArticleDate:11/30/2015

Globalcommoditypriceshaveplummetedtorecordlows.Here'showyoucansafeguardyourportfolio.Commoditieshavebeenwitnessinganearcatastrophicfallforquitesometimenow.Theslidethatbeganin2008hasremainedlargelyunchecked,barringasmall`reliefrally'in201112.CommoditiestrackerBloombergCommodityIndexhasfallen65%fromits2008peak.Itisjust8%shyofa25yearlowreachedin2009.Expertsreckon,beforethemarketstabilises,commoditiescouldevengobelowthe2009pricelevels.

Theglobaleconomicslowdown,particularlyinChina,hasbeenpullingdowncommodityprices.GlobalcommoditypricesarelargelydrivenbyChinaandthecountry'sshiftfrominvestmentledgrowthtoconsumptionledgrowthistakingtime,saysSuhasHarinarayanan,HeadofResearch,JMFinancial.Also,evenastherehasbeensomerecoveryintheUS,boththeJapaneseandtheEuropeanUnioneconomieshavestartedslowing.ThisexplainswhytheBalticDryIndex,whichtracksbulkcargorates,hasfallen96%fromits2008peak,tohitanalltimelow.

Thecostofproductionofseveralcommoditiesisalreadywellabovetheirmarketprices.Capacitiesarealsobeingshutdown.Inthepastoneyearalone,therehasbeena65%fallinthenumberofoilrigsintheUS.Also,thefearofanimpendinginterestratehikebytheUSFederalReservehascontributedtothecrash.

However,expertsreckon,thefallcouldendaroundDecember.GlobalcommoditiesmaybottomoutaroundthefirstUSFedratehike,itslike`buyonrumor,sellonnews'thepersistentpressureoncommoditiesislikelytoeaseoncetheuncertaintypertainingtoFedactionisbehind,saysNavneetMunot,ChiefInvestmentOfficer,SBIMutualFund.

Impactoneconomy

Thebroaderstockmarketindicescontinuetobeunderpressurebecausetheycompriseseveralweakcompaniesfromthecommoditysector.Inthepastoneyear,theNSECommodityIndexhasunderperformedtheNiftyby9%.Thoughlate,stockexchangeshavestartedtakingcorrectiveaction.TheBSEhasdecidedtosubstituteHindalcoandVedantaintheSensexwithAsianPaintsandAdaniPorts.Afterthechange,on21December,TataSteelwillbetheonlymetalcompanyleftintheSensex.

Fundamentally,eventhoughthecrashhasapositiveimpactonIndia,unlikeemergingmarketeconomiessuchasRussiaandBrazil,thecountryhasseenfundoutflowsduetoinvestors'herdmentality.Also,thecommoditycrashhasshakenthebudgetsofseveralcommodityexportersinWestAsia,forcingtheirsovereignwealthfundstosellIndianequities.ForseveralWestAsiancountries,thebudgetbreakevenisifcrudeisbetween$60and$80,andtorecoupthebudgetdeficit,sovereignwealthfundsfromcountrieslikeSaudi,KuwaitandQatararesellingIndianstocks,saysV.K.Vijayakumar,InvestmentStrategist,GeojitBNPParibas.

However,asIndiaisanetimporterofcommodities,atanaggregatelevel,thecountrystandstogainfromthecrash.Indiawassendingmoneyoutsideforbuyingcommodities,anditusedtocomebackasportfolioinvestments.Now,savingsintheimportbillwillmorethancompensateforthedeclineininvestments,saysMunot.

Also,thegovernment'sstrategyofretainingpartofthemassivefallincrudepricestherehasn'tbeenacommensuratefallinretailoilpricesshouldprovideitwithamplefundstoincreaseinfrastructurespendingandboosttheeconomy.Sinceprivatesectorinvestmentisnothappening,governmentspendingisneededtospeeduptheeconomicgrowth,saysVijayakumar.

ThefallininflationduetothecrashincommoditypriceshasallowedtheRBItogoaheadwithinterestratecuts.Ratesensitivesectorsshoulddowellforthenext12years,saysVineetToshniwal,ManagingDirector,EquirusCapital.Theratecuthasalsohelpedcompaniesreducetheirinterestburden.Theoverallcostpressureshaverecededforthecompanies,sothereisscopeforfurthermarginexpansion,saysMunot.

Stockinvestors

Sincecommoditypricesarenotgoingtoseeasuddenrecovery,investorsincommoditystocksneedtobeextracautious.Industrialmetalssuchassteel,aluminium,copper,zinc,etc.areamongtheworstaffectedcommodities.Thoughthegovernmenttriedtoprotectthemetalsindustrybyimposingantidumpingduties,thisisjustatemporarymeasure.

Also,thegovernmentcannothikethedutiesanyfurtherasantidumpingdutiesarenegativelyimpactingthemetalusers'segmentauto,engineering,etc.Giventhecrashinthemetalscounters,shouldinvestorsgoforbottomfishingnow?Expertsanswerinnegative.Betterstayaway.Don'ttrytocatchafallingknife,saysToshniwal.

Thissituationofthemineralssectorisalmostthesameasthatofmetals.Priceshavehitrockbottom.However,incontrasttometals,thereareexpertswhoaregettingbullishonsomeofthemineralcompanies.Indiancommoditystocks,especiallythePSUs,havebecomeadividendyieldplaynow,saysHarinarayanan.CashrichcompaniessuchasNMDCandCoalIndiaareofferinghighdividendyieldandmaycontinuetodosoastheyhavenomajorcapacityexpansionplans.Also,thegovernmentmayextractmoredividendinthecomingyearstomeetitsfiscaltargets.Theoilandgassectorisamixedstory.PrivatesectorupstreamoilcompaniesthoseinvolvedinexplorationandextractionsuchasCairnIndia,haveseenadirectfallintheirnetprofit.TheimpactonpublicsectorcompaniessuchasONGC,hasbeenlimited.Thisisbecausethefallinoilpriceshasbeenaccompaniedwithafallintheirsubsidyburden.ThoughPSUoilmarketingcompanies(OMCs)suchasIOCreportedalossinthelastquarter,itwasmostlyonaccountofexpensiveinventory,whichisshortterminnature.Withrefiningmarginsremainingrelativelystable,expertssay,OMCsarebetterplacednowthanupstreamoilcompanies.Thereisnotmuchclarityonupstreamsubsidyburdensharing,saysHarinarayanan.

Overtheyears,theincreaseduseofethanolasautofuelhaslinkedthepricesofsugarandcrudeoil.Andso,thefallincrudeoilpriceshaspulleddownglobalsugarpricesaswell.PopulistpoliticsinIndia,however,hasn'tallowedsugarcanepricestofallproportionately.Withthecostofproductionwellabovethesellingprice,Indiansugarcompaniesarenowstrugglingforsurvival.Sugarcompaniesarefacingbigproblems,andifthingsdon'tchange,theymaygoforbankruptcy,saysVijayakumar.

12/1/2015


Amongcommodityproducers,cementcompaniesaretheleastimpacted.Theyareproducingdecentprofits,despitealowcapacityutilisationofaround70%.Expertssaythatcementisagoodsectortobeinforthenext23years.Ifthecapacityutilisationincreasesfromthepresent70%to80%,duetotheinfrapush,theprofitabilityofthecompanieswillincreasesignificantly,Vijayakumar.However,giventhesizeofthecountry,investorsneedtoseethelocationofthecementcompaniesbeforeinvesting.Currently,prospectslookgoodforcementproducers,barringthoseoperatinginSouthIndia,saysHarinarayanan.

Evenascommoditymanufacturershavebeenfeelingtheheat,commoditydependentcompanieshavebeenenjoyingthebenefitsofthefallincommodityprices.Theyhavestartedreportingdecentprofits.Sectorssuchasaviation,oneoftheforemostbeneficiariesofthefallincrudeprices,iswitnessingincreasinginvestorinterest.Despiteaslowdownindemandgrowth,crudebasedrawmaterialusers,suchaspaintmanufacturers,haveshownincreasedprofits.FMCGisanothersegmentthathasshownmarginexpansion.Sincesyntheticrubbercanbemanufacturedfrompetroleumwaste,crashincrudepriceswasaccompaniedbyafallinnaturalrubberprices,helpingtyrecompaniestoreportbumperprofits.But,thispartywillnotlastforever.CrudeoilpricesstartedcomingdownfromNovember2014,helpinggrossmarginexpansionforFMCGandtyrecompanies.Thisbenefitwillstartwaninginthecomingquarters,saysHarinarayanan.Sincemetalpricescrashedafewquartersafterthefallincrude,itspositiveimpactonautoandautoancillarysectormaycontinuefortwomorequarters,sayexperts.

MutualfundinvestorsInvestors

needtobecarefulaboutmutualfundswithahighexposuretothecommoditysector.Givenmostsuchfundsareindexfunds,there'slittlefundmanagerscando.DedicatedcommodityorthemefundssuchasSBIMagnumCommaFund,MiraeAssetGlobalCommodityStocks,UTIEnergyFund,etc.alsohavelimitedalternatives.Now,theirstrategyistostayawayfromweakcommoditysectors,suchasmetals,andinvestmoreintoreasonablystablesectors.Relativetothecommodityindex,ourfunddidwell,duetosignificantunderweightinmetalsandoverweightinsectorssuchascement,agrochemicals,oilandgas,etc,saysMunot.

Directcommodityinvestors

Allinvestiblecommoditiesareinabearphase.AndthismaygetworseinthecomingdaysclosetotheratehikebytheUSFederalReserve.Whiletheinternationalgoldpricesmaygodownto$950$975pertroyounce,silverisexpectedtofalltoaround$12.5pertroyounce,saysPritiGupta,ExecutiveDirector,AnandRathiCommodities.However,thefallinpricesinIndiamaybenotbethatsteepbecauseofapossiblerupeedepreciation.Still,sincethepricesarelikelytofall,thereisnoneedtorushnowtoinvestingoldorsilver.Itwilldoinvestorswelltowaitforawhile.Goldandsilverpricesareexpectedtofallto`24,300per10gmand`30,000perkgrespectively,saysGupta.

Evenwhenitcomestobuyingornaments,buyersshouldconsiderplatinuminsteadofgold.Internationalplatinumhascrashedmuchmorethangoldinthelastoneyearandisnowplacedata22%discounttogold.Thishashappenedbecauseplatinumisalsousedasanindustrialmetalindieselvehicles.However,platinumbuyersshouldnotethatthemakingchargesarehigh,comparedtogoldandsilver.Sinceplatinumcannotbemeltedatlocaljewellerystoresandremadeintonewornaments,itsresalevalueisalsolesscomparedtothatofgoldandsilver.

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12/1/2015


what the commodity crash means for you

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