The commodity story for 2012

The past 10 years have been exceptionally good for players in the commodities market, albeit with a great amount of volatility. In these 10 years, copper has gone up five times, moving from USD 1500 to the present USD 7500. Crude has gone up from USD 19.5 to USD 109 per barrel, while the price of HR steel is up four times. Due to this uptrend in the commodities market, investments surged sharply in commodities-related businesses like mining, the setting up of new steel plants and so on. In fact, many oil fields where extracting oil was unfeasible went into production due to the price surge.

However, until 2007, no one would have thought that the global economy would face headwinds emanating from the US and the European regions. While the developed economies faced a serious slowdown, emerging economies like China and India continued to grow at a rapid pace, fuelling the growth in commodities. Many thought that these two countries would continue to demand more commodities to satisfy the increasing need of their growing populations, but now, they too are facing a slowdown. In China, the property market has started slowing down, and this has started impacting the demand for some of the industrial commodities. With the Chinese economy slowing down and the Indian economy grounded with paralysis on the political decision-making front, there is a serious question mark on how the commodities prices would behave in 2012.

All of this is relevant for the Indian stock market for the simple reason that 30 per cent of the country’s market cap is dominated by commodity-related stocks. Please note that commodity prices and the stock prices of commodity stocks move in tandem. Hence, it is very critical for investors to get a sense of how the commodity markets would behave in 2012. In the cover story, our research analysts Shashikant and Saikat Mitra have critically examined five industrial commodities – steel, copper, crude, aluminium and cement – to give a sense of how they are likely to behave in 2012. They are of the opinion that the prices of commodities would remain subdued for the first half of the 2012, and the second half would be more a function of how the Euro zone is able to navigate its financial problems and also how successful China is in managing its economy. This is surely a must-read story!

JSW Steel, one of the major players in the Indian steel industry, is passing through tough times. On one hand, the demand for steel has tapered off just when its new capacities went onstream. On the other hand, the company is facing allegations that it paid donations and bought land at higher prices than the market rates to get a nod for its pending mining lease. We have closely looked at the allegations of the Lokayukta and conducted an exhaustive analysis of the same. We believe that even on the valuations front, the company would find it hard to beat the overall market, and hence suggest that our readers stay away from the counter.

As usual, we always welcome your critical feedback. Do share your opinion on the content of the magazine by writing in to us at managingeditor@dsij.in. We look forward to your valuable inputs