After a sharp correction across asset classes following a currency devaluation by China early this month, which has raised growth concerns, metals and crude oil prices have seen a sharp recovery in recent days.
Base metals have recovered by four to six per cent and Brent crude oil has jumped 18 per cent. There is an emerging view that metals might end higher this year, albeit with much volatility.
A hope is emerging that measures taken by Chinese authorities to spur demand, like a rate cut and reducing reserve requirements, will help prop demand for commodities, including base metals. Crude oil also went up due to reports of some members of the petroleum exporters' cartel, Opec, pushing for a supply cut.
Kunal Shah, head of research at Nirmal Bang Commodities, said: “Recent moves by PBOC (China's central bank) like infusion of liquidity, aggressive rate cuts and reserve ratio cuts' lag effect will be visible in the coming months. Generally, it takes two months to see the impact of such measures. Above this, the housing sector in China has bottomed out and sales are moving up, along with prices. Though China is slowing, it's growing at 6.4 per cent (yearly) and the economy’s size has expanded from $6 trillion to $10 trillion. There is no evidence of a hard landing. So, demand and ongoing production cuts will help (prices of) commodities to stabilise and gradually move up in the coming quarter. I think the worst is over for commodities.”
Andrew Cole, principal analyst at Metal Bulletin Research, feels base metals have overshot on the downside and will be at higher levels by the end of the year but there could well be some false starts before we get a more significant or sustainable recovery. He says it “might be too early to call the bottom just yet”. He will wait for some more days to see if these rebounds in the past two days are pounced on by the bears, which might welcome these as fresh selling or shorting opportunities.
Crude oil prices have seen a sharp recovery. However, says Abhishek Deshpande, lead oil analyst at Natixis, a London-based commodity research house, said: “Most of the support, we believe, is due to the short covering after the rapid selloff in oil earlier this week. Chinese equities were up sharply after the announcement of rate cuts by China. Oil fundamentals are still unchanged, so we continue to remain bearish on oil for now. Also strong numbers from the US and UK are all supportive of strong oil demand growth in general.”
Following a sharp recovery in metal prices, metal companies' share prices in the Indian market have shown a spurt. From Wednesday, the benchmark Sensex has recovered four per cent and the BSE Metal index has risen 10.2 per cent. Should you now buy metal stocks? Mahesh Nandurkar, the India strategist at CLSA, advises a watch for more data to understand the price and demand outlook. He said, “International commodity prices have come off due to the growth outlook worsening in China and its global impact. The key worry continues to be whether the yuan will get devalued further. If that happens, the rest of the emerging market currencies and commodity prices will see a further downside. It will be interesting to watch for the forex reserves' trend in China. If that stabilises, it will give comfort on the yuan outlook and, therefore, global demand outlook and commodity prices.”