INSUBCONTINENT EXCLUSIVE:
ET Intelligence Group: Until about a couple of weeks ago, metal analysts had generally backed local producers to make money for investors
despite the sharp recent cuts in stock prices
For them, the pronounced slide was less structural than transitory, masking the likely effects of competitive currency devaluation by the
tariff walls, Indian manufacturers are staring at potentially lower prices for their output.
Since mid-June, the yuan has fallen more than 6
per cent, while aluminium, zinc and copper on the LME are down 19.4 per cent, 9 per cent, and 14.5 per cent, respectively
China remains the biggest consumer and producer of metals and its currency movements can impact global commodity prices.
This is because
commodities are traded in US dollar
With a weaker Chinese unit, commodity prices in the local currency increase, leading to eventually declining demand and consequently lower
global commodity prices in US dollar
Hence, the Chinese currency depreciation is highly deflationary for commodities across the planet
The US Fed, too, has become more active in the currency market, and its involvement may temporarily arrest the fall in commodity
These ratings have been based on earnings estimated at certain price levels
LME metal prices are now at levels below which the estimated earnings of these companies will be much lower than expected.
Most analysts,
for instance, have assumed LME Aluminum prices of around $2,100 per tonne
Currently, LME Aluminum prices are $2,080 per tonne
Similar is the situation with other base metals that are now trading sharply below their 100 and 200 DMA.
Lower realisation could not only
impact the profits of these companies, but also lead to derating for these stocks.
