Metal markets

SMARTSHARE

Since 2002, the global financial economy has been driven by up-cycles in primary commodities rather than higher productivity in manufacturing (early 1990s), or growth in service industries (late 1990s).

The story has been about oil, gas, ferrous and non-ferrous metals "" each has seen a sharp, sustained rise in global prices.

Since global commodity cycles are closely linked to Indian cycles, the effects on the domestic economy have been much the same.

This shift in focus is due to two major factors; doom and gloom in Iraq coupled with economic buoyancy in China. While Iraq's troubles have kept crude prices up, the metals demand has been driven by China.

China has been a net importer of copper, zinc, aluminium, iron ore and steel. It has also ramped up its own domestic production capacities in each of these.

Next year, it may turn into a net exporter of metals and finished metals. That would mean a massive shift in global outlook for ferrous and other base metals.

Exporters from all over the world could suddenly find themselves in competition with Chinese firms, which flood the market and drive prices down. India has a lot of major metals players such as Tisco, Sail, Jindals, Sesa Goa, Hindalco, Sterlite, etc. All of these could struggle in a scenario where their biggest overseas market turns into their largest global competitor.

After three years of smooth uptrends in commodity pricelines, 2006 could see a scenario where there are huge spikes in commodity volatility with metals prices moving sharply and almost unpredictably in both directions.

That's bad news for manufacturing companies "" they have to make a call on both input prices and on sales realisations.

But it could be good news for commodity traders "" the perfect situation for a trader is a market with guaranteed volumes, high price-volatility and good leverage. If prices are moving two ways with great rapidity, a trader can make more money than if they are moving in only one direction.

This is especially true in commodities where contracts are highly leveraged and time bound. Of course, a trader can also lose enormous sums with the greatest of ease in such a situation!

Until a couple of years ago, the question of dabbling in commodity trading didn't arise for the average Indian. There were the traditional traders who concentrated on agro-markets and there were the institutional buyers.

That changed with the establishment of the commodity exchanges. These are actually exchanges that trade derivatives contracts on an array of commodities. The exchanges have their own warehouse chains and they've streamlined their price-discovery mechanisms and contract sizes.

The process has been institutionalised to a point where opening a commodity trading account and demat is as easy and not much more expensive than holding an equity trading account. Many brokers offer commodity trading facilities and some offer online services.

Given margining considerations, Rs 50,000 will be enough to get a position. If you're dealing with agro-commodities, then expiry dates on warehouse receipts are crucial. With metals, that's not such a big deal.

Volumes on Indian commodity exchanges have been steadily rising. Now might be a good time to do the paperwork and sign on.

Some time in the next year, maybe in the January-March quarter itself and certainly by September -October, short positions on metals will start becoming profitable.