Investors cautious on rising commodities

Warmer-than-expected retail inflation in August jolted the rally of stocks in India as investors expected a fall in prices to prompt the Reserve Bank of India to reduce interest rate hikes. On Wednesday, US stocks suffered the worst as the pandemic for the first time caused an uproar in global markets due to higher-than-expected inflation data.

The recent surge in coal prices and continued strength in natural gas are being perceived by investors as a serious threat to inflation and earnings of the company. In turn, higher energy prices have reduced metal production capacity in Europe, which may lead to an increase in metal prices. “India’s inflation is likely to remain elevated in the near term due to higher energy prices (oil and gas prices) and food prices,” said Mitul Shah, Head of Research, Reliance Securities. End of FY23.

Analysts said while the pressure on steel makers’ profits due to higher coal prices means steel prices could also rise, aluminum prices were also supported by news that China’s Yunnan province this week Producers of electrolytic aluminum have been ordered to reduce the use of electricity.

LME aluminum prices are up 3.31% last week.

According to Vikram Kasat, head of advisory at Prabhudas Lilladher, every $100 increase in coking coal prices per tonne results in an increase of about $70-80 per tonne of steel cost for primary steelmakers.

Notably, the prices of coking coal, which is imported on a large scale, have touched nearly $300 a tonne after hitting a low of around $210 in the first week of August. This could put pressure on the cost of production of most of the base metals and cement.

Gas prices are also one of the major concerns, especially given the expected hike in domestic gas prices during the second half.

Experts said gas prices in the US and Europe have more than doubled, while spot prices in the Asian market have risen by more than 80%. Rising international gas prices mean that Indian gas prices may also go up during the six-month review from the second half of FY23. In the first half of FY23, gas prices were at $6.1/mmBtu (Million British Thermal Units), but are expected to rise to around $9.5-10/mmBtu in the second half due to higher global prices. This will increase inflation further.

While Brent crude fell nearly a fifth from its March high of $123 a barrel, it rose to $94 from $86 on September 7.

“Input price pressure is likely to persist, leading to short term inflation,” said Naveen Mathur, director, commodities and currencies, Anand Rathi Shares and Stock Brokers. Higher CNG prices can also increase the transportation cost.

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