According to their analysis, steel, cement, crude, coal, copper, aluminum, iron ore, palm oil and caustic soda are the key commodities relevant for Nifty50
companies, prices of which rose by up to 75 per cent since June 2020.
“Despite this, markets
have so far ignored commodity risk as gross margins for most Nifty stocks (ex-staples sector) in fact expanded during 3QFY21. Inventories, typically between 17 – 85 days, have so far cushioned the impact of commodities' price spurt,” BofA
Copper and oil prices flare
Among key metals, copper prices on the LME breached the $9,000 a tonne level for the first time since September 2011 on hope of a pick-up in demand after the Chinese New Year. Three-month copper on the London Metal Exchange (LME) climbed as much as 3.1 per cent to $9,187 a tonne, the highest since September 2011, also helped by a weaker dollar.
“If oil price can definitely surprise on the upside, the same also applies to copper. GREED & fear has been hearing for years from commodity experts that copper is the most supply constrained commodity in the world. It is entirely feasible that copper replicates, if not improves upon, the six-fold increase in prices it managed in the last copper bull market,” wrote Christopher Wood, global head of equity strategy at Jefferies in a recent note to investors.
Besides the rise in commodity prices, sporadic lockdowns across key business hubs in India and rising bond yields, according to Shah, are another cause for concern that could keep a lid on market sentiment. “With Nifty already at our year-end target of 15000, continuation of a broad based market rally appears unlikely. Sector rotation could help generate returns,” Shah wrote.
On Monday, the markets
extended their losing streak, with the S&P BSE Sensex slipping 1,145 points to end at a three-week low of 49,744 levels. The index has lost around 5.3 per cent from its all-time high of 52,516 levels.
A rise in oil prices, analysts say, is also detrimental for India’s twin deficits and will also fuel inflation. Every $10 per barrel increase in crude prices leads to an additional fiscal deficit of $12-13 billion and a current account deficit of $10-11 billion, notes a recent report from BNP Paribas Mutual Fund. Since their April 2020 low of around $19 a barrel, Brent crude oil prices have jumped around 230 per cent to nearly $63 a barrel now.
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