The Chinese factor

Beating The Street

Almost every entity with functional furnaces or access to ore has turned profitable.

The bull run in Indian ferrous stocks bears testimony to that. Analysts who had ignored Tisco, Jindal and Sesa Goa were tomtomming their competitive global advantages.

Even basket cases like Sail and Essar have received their share of attention in the recent past.

Regardless of the diplomatic status between the two most populous countries, Indian steel manufacturers love the Chinese. The Chinese economy is currently the only global engine of growth.

European and US recovery has been too slow to be an effective driver and Japan's unending recession continues. While Indian growth is strong, the economy isn't big enough to make a substantial difference to world GDP yet.

Most commodity cycles hit rock-bottom last year and price improvements since then have driven almost exclusively by Chinese demand. Unless the Chinese economy overheats, this trend could continue for another year before US-Euro pick up slack.

Non-ferrous metals have also gotten into the act. In the last quarter, there have been significant improvements in the London Metals Exchange prices of aluminium, copper and zinc.

Once again, the basic reason appears to be Chinese demand "" the PRC is the world's biggest copper and zinc consumer. A bull run has started in the prices of Indian non-ferrous producers although the correction this week has halted it, if only temporarily.

Precious metals have also done well in 2003. Gold spiked after the Iraq invasion and even now, prices of $370-plus per ounce are well beyond anything seen since the early 1990s. Platinium is at a 30-year high and silver is also trading firm "" dirt-cheap Argentine production is the only thing holding it down.

The reasons are different in each of these cases. Platinium and silver are important industrially and prices have been driven by a demand recovery.

Gold is a hedge against inflation and of very limited industrial application. Gold prices are responding to the perception that global crude supplies will remain uncertain until Iraqi pipelines start flowing sometime in the future.

The yellow metal's prices remained muted through the late 1990s and beyond because of low global inflation and also, a policy of staggered gold sales by several central banks, including Switzerland and Russia.

Mostly, metals tend to have long cycle periods although there are huge variations in trends, of course. Prices can rise or fall for several years at a time.

Extraction and mining processes take a long time to increase capacity to service a rise in demand and, when demand falls, it is politically difficult to simply shut down smelters, furnaces and mines and lay-off labour by the lakh.

Producers cut prices and maintain larger inventories in downturns. Smart players also expand capacity during recession so that they are better-placed to service demand once the cycle turns.

According to "Dr Doom" Marc Faber, the next decade will see primary commodities in a massive bull run. If he's right and he has a tendency to be, a core sector of the Indian economy will bless him!