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Metal prices have been on the rise and now with the news that LME is banning Russian origin metals, how are you looking at the implications of this move?
Amit Dixit: First of all, this is not a very new phenomenon. We have seen this happening ever since 2018 when the Russian origin aluminium was banned and the aluminium prices went up 10%. Now, coming to the current event, Russia is a major supplier of aluminium. Together with it, nickel and copper of Russian origin have also been banned. This has implications for all the three metals.
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In particular, I would say that nickel and aluminium matter the most and we have seen aluminium prices going up this morning and along with that, aluminium stocks. However, it is imperative to delve into the finer details because earlier also there were carve-outs and I would expect that the similar thing will happen now as well, but it will take a little bit of time. So, the current rally in aluminium prices in LME and all the related aluminium stocks might be a little bit fleeting from that perspective.
Would you say this is looking like the start of a commodity upcycle, an elongated one, or would you say that this is at best a short-term uptick that one is seeing?
Amit Dixit: No, this is a very short-term phenomenon. Typically, you will find that such news results in knee-jerk reaction and that impact is pretty short term. However, talking about the commodities upcycle, if you look at it, this can only aid it. Otherwise, the concerns on inflation that we have at the current moment and various other geopolitical tensions have always been adverse to the LME prices. However, there would be mornings like these when you will find that because of certain policy decisions, aluminium or nickel or for that matter copper going up.
Historically we have seen and I will just draw everyone’s attention to this one simple fact which is that Russian oil was off the market because of sanctions, but there were a lot of ways in which Russia was able to sell. When Russian oil was supposed to go off the market, everyone thought that crude would move to triple digit from double digit, but that is not the reality. Could a similar factor be at play when it comes to metal prices?
Amit Dixit: Absolutely. The last time also we saw that there were carve-outs and at the end of the day nothing really mattered. If you recall in 2018, aluminium prices went up by 10% in one single day. But if you look at the reaction now, it is relatively muted. So, yes, I would tend to agree that what happens at the end of the day, the world needs aluminium, copper, nickel and nobody can afford prices going up just because of policy decisions by one or two major countries. So, I would expect that there would be carve-outs. There would be ways and means by which you would find that the actual impact would be far lower than what people are expecting currently.
Do you think affordability becomes a challenge? Copper at 9000 plus, aluminium prices going through the roof. At what point in time affordability would start hitting back and there could be a pushback from commodity consumers?
Amit Dixit: It depends on where the demand side is. Currently, we see that demand is pretty weak around the world. China is not the same China as it was 10 years back. So, China is not supporting and at the moment, demand is weak, you will find a lot of resistance from the customers. So, I would be surprised if aluminium at 2600 plus, copper at 9000 plus sustains for a long period of time. That is why I said I see it as a pretty short-term impact.How do you think the steel cycle is likely to move because one tailwind for the steel sector is international coal prices have come down. Second tailwind for the steel sector is that Indian demand of late has been very strong. Third, while China is no longer China of old, it is much better than what everyone thought, six months to one year ago.
Amit Dixit: We are quite bullish on steel and not because of China but because of the fact that in India itself, there is ample scope of domestic consumption. Now, what we are looking at, what people are looking at is the capacity is coming on board through FY25. However, these capacities are staggered and therefore the overall capacity surplus on glut that people are expecting would be far lower. The second point here is that for the first time in India we had three years of double-digit consumption growth and we expect consumption to be around 8.5% to 9% in the near term and therefore, Indian steel consumption by FY32 would be double of what it was in FY23. So, clearly we need capacities over and above that people are coming up with.
We have not seen substantial long steel announcements and in India, the consumption is more on longs because of the infrastructure push. Therefore, stocks like JSPL, Shyam Metalics are more favourably placed on the long side and are likely to benefit more. The steel cycle has become very local, ever since Covid disrupted the supply chain and in India, the issue was coking coal prices going up and the domestic steel prices down. Therefore spreads were crunched. Spreads also have found a little bit of respite. So, if you have spreads getting better, you have ample scope of increasing volumes, I think steel is here to stay.
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