What is triggering this bull run in commodities – supply side issues or demand improvement?
It is definitely the demand side. Chinese demand picks up normally whenever the world is going through a crisis. This has happened over and over again in the last two decades. The same thing happened when Covid struck. China has been the saviour of global commodities market. But this time around, unlike in the previous bull run, there is clear visibility that most of the governments will boost infrastructure to push demand. So that gives a clear runway for the commodities rally to last longer.
However, this does not mean that commodity prices will continue to go up. Higher for longer is the theme for the next 1-2 years.
What will be the impact of steel reforms in China on Indian companies?
Steel is a global commodity and China accounts for 50 per cent of its production and consumption. So anything happening in China has a major bearing on steel prices globally. A 13 per cent reduction in export rebate will lead to a sustainable increase in steel margins for all global steel companies, including those from India.
In the previous bull runs, have you seen higher commodity prices derailing infra or construction related demand?
I don’t think that has happened in India. When China and the rest of the world try to go together after commodities, then enough commodities are not available.
In the last decade, there was underinvestment in mining because commodity prices were very low. The returns were not there and mining companies were not investing in expanding capacity. Now China is importing and there is a visibility that US and other developed economies, including India, are also going to grow very fast. So clearly, commodity prices are going to be much higher than what they were in the last decade.
On the inflation side, what matters is China and not India. If inflation picks up in China, then the Chinese government is going to pull back on the stimulus. That would lead to a lot of mini cycles within the larger commodity cycle. So we might see dips of 20-30 per cent or even more in commodity prices.
Inflation generally takes time to trickle down to finished products. Steel prices are up 2x in India but the proportion of steel prices in CPI index is very miniscule, whereas consumer products like cars, two-wheelers or tractors have a much higher weightage. But we have not seen large increases in the prices of finished products because the demand is still low. Producers are not able to pass on the higher raw material prices.
So inflation impact will come when the economy is totally heated up. Probably, it is still 9 months away. But keep a watch on Chinese inflation because that will have a much higher bearing on commodity prices.
