A reliable signal of industrial recovery is revival in demand for metals. This can be tracked with some certainty because global metal prices are well-aligned. Right now, there is definitely a price revival and it is led by major Asian economies. Whether it can be sustained, given fresh signs of weakness in the EU and on Wall Street, is a different matter.
However, if the recovery gains momentum, metals will be among the best performers in the next 6-12 months. That should, by extension, mean that primary producers will do well. Steel is doing well and is likely to do better since the auto industry is picking up. Copper and aluminium have seen spectacular price recoveries in the past six months. Zinc and lead have also seen prices zoom.
Copper is now trading at a 20-month high on the London Metals Exchange while aluminium is at a 19-month high. China is, as usual, the main demand driver. Asia in general seems to be leading the Europe and the US, though demand there may also have picked up in the past three-four months.
There are some dangers. There is always a speculative element to this kind of price recovery since commodity exchange prices are driven by anticipated demand. Much of China’s metal demand is actually driven by export of value-added products and if that is derailed, there could be a global slump in the metals markets.
India has several majors, including big guns Hindalco, Sterlite and Sterlite’s sister company Hind Zinc. There’s good reason to believe that they will be strong participants in any continuing rally. Sterlite recent announced a bonus (1:1) and a stock split (2:1). The January-March 2010 net has more than doubled. Hind Zinc has also seen profits multiply.
Both stocks face significant danger due to adverse publicity on environmental and human rights fronts. Some global investors have divested Vedanta Resources (the London-listed holding company) on ethical grounds and this could snowball.
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Hindalco, on the other hand, has seen foreign institutional investors triple their collective holdings in the past year, while the stock price has more than tripled.
Assuming Sterlite-Hind Zinc-Vedanta can ride out the storm of negative publicity, there could be quite an upside. Ditto for Hindalco. Another thing that could get interesting is stake sales in Nalco and Hind Copper, which are likely to attract a lot of attention in a metal bull market.
The author is a technical and equity analyst