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After a bounce-back in metal prices in July, the recent decline has taken the market aback. The threat of a China-led global economic slowdown is adding to the bearish outlook for metals.
In this backdrop, it would not be a good idea to fish at the bottom. Average prices on the London Metal Exchange (LME) for aluminium, copper, nickel, zinc, lead and tin during July-August are substantially lower than the average prices in April-June. Prices are 22-45 per cent lower, year on year, as well.
Goutam Chakraborty, an analyst at Emkay Research, said the bottom had not been formed yet for base metals. "Over 20 per cent global aluminium smelters are incurring cash losses at current LME prices. Once their loss-making capacity exhausts, they will start cutting production. Two years down the line, we see a lot of capacity cuts in aluminium, which could trigger a turnaround in its prices," said D Bhattacharya, managing director, Hindalco.
There are various views on the bear market cycle for commodities that do not indicate a respite anytime soon.
Copper prices at $5,060 a tonne on the LME are down 20.5 per cent year on year. Goldman Sachs recently said it expected copper to fall to $4,500 by the end of 2016. Its analysts added the $4,500 level would persist throughout 2017 and 2018, till "the market adjusts to a seven-year bear market cycle" and gets back to $5,500 in 2020.
Barclays' view on copper is no different. The research house said there was a growing risk that copper prices would fall further because of heightening risk that China would face a hard landing. This scenario is weighing on the stock prices of metal companies. Hindalco has seen its stock price decline from a 52-week high of Rs 184.95 in August 2014 to a 52-week low of Rs 82.30 on in August 2015 before closing at Rs 86. Vedanta has seen sharper drops from a 52-week high of Rs 296.35 on August 22, 2014, to a 52-week low of Rs 93.20 on August 21, 2015, before closing at Rs 94.75.
Though the companies are managing their operating performance through lower raw material costs and operating efficiencies, these are not adequate at the net profit level, given increasing interest and depreciation costs. Analysts are lowering their earnings estimates for companies. For Vedanta, Centrum Broking has lowered its profit estimate for 2015-16 by about 20 per cent, with a target price of Rs 205. For Hindalco, its target price is at Rs 95.
