Cover Story

Published: Dec 29, 2021
Updated: Dec 29, 2021

Where to Invest in 2021?

The global metals sector, like most other economic segments, was seriously impacted by the first wave of the Covid-19 pandemic in early 2020. But incredibly, it bounced back with a bang and was ruling the stock market roost till as recently as March this year (Nifty Metal shot up by 150 per cent from 1,585.90 on March 31, 2020 to 3,963 on March 31, 2021).

More recently, a sideways movement in metal stocks has been noticed, but a renewed global construction boom, especially in China and the US, has once again led to a surge in demand for input metals like aluminium and copper. The prospects for metals are equally promising in India, where user industries like automobiles and railways are once again on the fast track.

In terms of raw material output too, India is the second largest global producer of coal and steel with reserves of 326.50 billion tonnes in the former and an output of 97 million tonnes in the latter. Moreover, demand for metals is again on the rise with state-wise lockdowns being lifted and the Centre pushing for resumption of business activity.

The metals sector, which was battered in 2019 by the disastrous tariff war between the two giant economies, the US and China, and pummelled further in the first quarter of 2020 due to the sudden onslaught of Covid-19, staged an unprecedented boom even during the pandemic period, to the surprise of all — trade and industry circles, analysts and mining & metals experts. Prices of all base metals as well as manufactured metals like steel have zoomed to unbelievable high levels and even the stock prices of metal companies have surged. In fact, the Nifty Metal, the popular stock market index for metals, shot up by 150 per cent from 1,585.90 on March 31, 2020 to 3,963 on March 31, 2021.

This phenomenon has left trade and industry circles as well as experts with only one question: Will this boom continue or will the uptrend be reversed? This question is making the rounds of business and market circles as prices of most metals have started moving sideways. In fact, except for tin which has remained buoyant, almost all other metals have started presenting a dull and drab market scenario with prices dawdling aimlessly. Last week, iron ore prices fell as China’s trade data for May 2021 showed narrowing profit margins for the country’s steel markets – responsible for more than half the globe’s output. According to S&P Global Rating agency, the pandemic had a significant impact on industrial activity, global steel markets, end users of other metals, and downstream producers. Though the world seems to be emerging from the pandemic, a sustained road to recovery and the potential for prolonged economic weakness remain a key source of uncertainty. This could undermine sustained buoyancy, weaken market sentiment and increase volatility in commodities.

The issue now is whether the buoyancy can continue, going ahead. To analyse the prospects, the metals market has to be segmented by type (copper, zinc, lead, nickel, June 15, 2021 Corporate India 35 aluminium and tin), end-user industry (construction, automotive and transportation, electrical and electronics, consumer products, medical devices and others) and geography (Asia-Pacific, North America, Europe, South America, Middle East and Africa).

According to an analytical study by Mortol Intelligence, a renowned market intelligence firm based in Hyderabad, metal production has been impacted by the Covid-19 pandemic and its disruption of industrial production due to lockdown regulations, shortage of workers and raw material supply since the beginning of 2020. Base metals have all seen significant price drops as the pandemic’s economic impact has reduced consumption across the metals and mining industry and created a great deal of uncertainty. According to the 15th China International Copper Industry conference, global copper mine production shrank by 0.3 per cent in 2020. The major end-user industries of base metals such as construction, automobile and transportation were also negatively impacted by the lockdown regulations due to Covid-19. The global automotive industry witnessed a decline in sales in 2020 which was approximately 78 million units, much below 90.4 million units sold in 2019. However, things have started changing from 2021.

METALS IN CONSTRUCTION

Viewed in the context of the end-user industry, demand has started growing from the construction industry. Chosen for their durability and strength, base metals used in the construction industry serve a wide range of functions, and the most common of them are aluminium and copper. Aluminium is commonly used in the construction industry because it is resistant to corrosion, highly conductive and ductile. Copper-based tubing is often used to construct pipes in buildings. Copper is a ductile and malleable metal and is also recyclable.

From a geographical point of view, the Asia-Pacific region will continue to account for the largest consuming region for base metals. China is in the midst of a construction mega-boom. It has the largest building market in the world, making up 20 per cent of all construction investment globally. China alone is expected to spend nearly $ 13 trillion on buildings by 2030.

In India, foreign direct investment (FDI) received in the construction development sector (townships, housing, builtup infrastructure and construction development projects) from April 2000 to December 2019 stood at $ 25.37 billion. The North American construction industry will be driven by activities in the US. Major industrial projects in the US that are expected to be completed during the next 5 years include the Baltimore airport, the Dallas Fort Worth Airport, the Columbus Airport, Dreamport Villages Amusement Park, TSX Broadway, etc. In Canada, various government projects such as the New Building Canada Plan and Affordable Housing initiatives are supporting the sector’s growth. The Canadian government plans to make an investment of nearly $ 140 billion for major infrastructure developments by 2028. The mining and metals industry is recovering from one of its most difficult periods in decades. Market volatility and a downturn in commodity prices have created a new normal where cost cuts, automation and operational efficiency are vitally important.

Pointing out that “meanwhile, industry-specific issues related to regulation, geopolitical risk, legal limits on natural resource use, shareholder activism and public scrutiny have created additional challenges,” Nicholas Maennling and Perrine Toledano, experts at Columbia Centre on Sustainable Investment, Columbia Law School, add, “While we believe that demand for minerals will grow in the coming years, there are several trends that will determine which types of mining companies will prevail in the future. We have identified the following seven drivers that we believe will shape the mining and metals sector.”

1. Transition to a low-carbon economy Demand for most minerals is projected to be high in order to achieve the energy transition. While fossil fuels have helped to improve living standards around the world since the 18th century, their associated greenhouse gas emissions have led to global warming. In order to avoid reaching temperatures that will have catastrophic consequences for the planet, countries must decarbonise their energy systems by the middle of this century. Given that low-emission energy and transportation systems are more mineralintensive than their fossil fuel-based counterparts, the transition provides a great opportunity for the mining sector. At the same time, the mining sector will have to reduce its own emissions. Mining companies that power their operations with renewable energy, operate electric or hydrogen-powered truck fleets and integrate recycling in their value chains will be best-placed to sell low-carbon premium minerals.

2. Access to resources Companies will need to venture into frontier mining areas. As world-class mineral resources in low-risk areas become exhausted, mining companies must either master new technologies for extraction and processing, or venture into frontier areas where extraction has not previously been economically viable. Automation and digitalisation will result in more targeted and efficient mining, which could further be enhanced through technological breakthroughs in areas such as in-situ leaching (a mining process used to recover minerals such as copper and uranium through boreholes drilled into a deposit), block caving (an underground mining method that uses gravity to exploit ore bodies located at depth) or bio mining (a technique for extracting metals from ores and other solid materials typically using prokaryotes or fungi).

3. New ways to finance mining As mining companies try to limit risk, novel financing and production models will become more common. After demand from China triggered a commodity boom in the first decade of the 21st century, prices collapsed and mining companies were forced to focus on reducing debt ratios and improving their balance sheets. Alternative financing solutions were developed such as royalty and metal stream agreements that reduce the burden on mining companies' balance sheets. To spread the risk of new capital-intensive projects, these financing solutions are likely to continue to grow. Companies may also seek to develop joint ventures similar to those observed in the oil and gas sector in order to reduce their exposure to a particular project or jurisdiction, and may also consider service agreements.

4. A social contract for mining Creating real benefits for communities near mine sites will be key for successful new projects. Obtaining the 'licence to operate' from local communities has been a challenge for the mining industry in recent years. Many proposed projects have been rejected, and operations have been disrupted by protests. With a record number of mines nearing the end of their life and insufficient money being set aside for remediation, with new mining projects increasing the sector's footprint without necessarily providing additional employment opportunities at the local level due to automation, and with increased water stress and extreme weather events due to global warming, local opposition to mining is likely to increase if no new business models are developed that benefit the affected communities.

5. Big data and mining Data transparency to aid the mining industry's relations with stakeholders. Collecting and processing massive amounts of data will be essential for mining companies as they digitalise and automate their operations. What data should be shared and made transparent will continue to be a major area of future drivers of mining 7and metals sector debate. Governments will seek to further push for disclosure of subsidiary structures to address tax base erosion; consumers will seek to increase value chain transparency; investors will use the proliferation of non-financial data to better assess the risks of their mining portfolios; civil society will continue to push for companies to go beyond the mandatory EITI Standard; and impacted communities are particularly interested in accessing data that capture the externalities that affect them.

6. The geopolitics of mining Mining companies must navigate rising geopolitical risk and economic protectionism. A growing popular resistance to globalisation and free trade is altering politics, and directly affecting the mining and metals sector. Policymakers in mining jurisdictions are increasingly trying to enact local content laws and regulations which require minerals to be processed before they are exported. At the same time, import restrictions on semi-finished products such as steel and aluminium are at the centre of recent trade disputes. Trade wars and increasing protectionism are likely to dampen global commodity demand and disrupt the value chain of mining and metals companies.

7. Modern mining workforces Maintaining an open dialogue will be key as mining companies try to revamp their employee base. Constantly evolving technologies and business models will require mining company employees to develop new skills. The sector will have to increasingly compete with the IT sector to attract top talent from universities in order to drive its digitalisation and automation processes. Governments and companies will have to work together to help transition workers that cannot be absorbed by an automated mining sector to new activities through retraining and transitioning programmes. The speed at which mining companies will be able to roll out new technologies at their mine sites will be closely linked to the host government's and labour unions' acceptance of reduced employment and procurement opportunities. (Nicolas Maennling and Perrine Toledano are cocurators of the World Economic Forum's 'Transformation Map on Mining and Metals'.) The Middle East and African region are projected to be the fastest growing regions. Countries in the Gulf Co-operation Council have been hit hard by the weakness in oil prices in the last few years but now, as oil prices have started picking up, large-scale investments in infrastructure projects will be a key driving force behind the construction sector’s growth in the region. Owing to all these factors in various geographical areas, the demand for base metals is expected to surge during the next five years.

CHINA’S INFRA BOOM

Of late, China has emerged as the largest construction market in the world. As the government has planned to focus on improving the infrastructure in small and medium-sized cities, the construction industry is projected to maintain a continuous growth of about 5 per cent annually, the country investing $ 1.43 trillion in the next five years. Moreover, according to the National Development and Reform Commission (NDRC), the Shanghai Plan includes the investment of $ 38.7 billion in the next three years whereas Guangzhou has signed 16 new infrastructure projects involving an investment of $ 8.09 billion.

China is also the largest manufacturer of automobiles in the world. Even though the Chinese auto market declined in 2019, the electric vehicle segment witnessed huge growth as the government decided to promote financial subsidies for new electric vehicles. Accordingly, all new EVs purchased between January1, 2021 and December 31, 2022 are exempt from vehicle purchase tax. India has been the largest market for the automobile industry. Although during the last 12 months, production and sales registered a drop on account of the pandemic, the situation is expected to improve going ahead. Furthermore, Indian Railways operates one of the world’s largest rail networks with a route length of 1,23,235 kilometres, and 13,523 passenger trains and 9,146 freight trains transporting 23 million passengers and 3 million tonnes of freight per day from 7,349 stations. The government has allocated a huge amount of Rs 72,216 crore in the 2021 budget for railways. This will boost the base metals market in automobiles and transportation going ahead.

Copper, tin, nickel and aluminium are some common metals used by the electronics industry. The Asian region is the largest producer of electrical and electronics across the globe with countries such as China, Japan, South Korea, Singapore and Malaysia dominating at the national level. In the electronics segment, China generated the highest revenue globally (around $ 173 billion). By 2019, the total revenue generated in the Asian region was $ 227 billion which is expected to cross $ 260 billion by 2024.

According to JEJTA (Japan Electronics and Information Technology Association), total sales of electronics devices in Japan during 2019 were around 263.6 billion units generating a revenue of $ 43.38 billion. Though production and sales have declined in 2020 on account of the pandemic, prospects for the next five years are rated highly encouraging. In short, demand for base metals will get a big boost during the next five years with vigorous demand for electronics products going ahead.

INDIA’S METAL WEALTH

India is rich in the mining and metals segment. It produces 95 minerals, 4 fuel-related minerals, 10 metallic minerals, 23 non-metallic minerals, 3 atomic minerals and 55 minor minerals. The country is home to 1,531 operating June 15, 2021 Corporate India 39 mines. India has large reserves of iron ore, bauxite, chromium, manganese ore, barite, rare earth and mineral salts. During the year ended March 2020, coal production was 958 lakh tonnes, lignite 42 lakh tonnes, natural gas 2,328 million cu m, crude oil (petroleum) 27 lakh tonnes, bauxite 1,634,000 tonnes, chromite 582,000 tonnes, copper 11,000 tonnes, gold 153 kg, iron ore 204,000 tonnes, lead 26,000 tonnes, manganese ore 181,000 tonnes, zinc 117,000 tonnes, apaiute and phosphorite 133,000 tonnes, limestone 272 lakh tonnes, magnesite 8,000 tonnes and diamonds 3,213 carats. After 19 coal blocks were auctioned in 2020 for commercial mining, India has emerged as the second largest coal producer in the world and the total expected revenues from these coal mines has gone up to Rs 6,656 crore. In steel also, India is now ranked as the second largest producer with the total number of steel plants crossing the 900 mark and producing crude steel amounting to over 93 million tonnes.

Prices of almost all metals tended to drop on the outbreak of the corona pandemic with production demand and prices recording a downward trend. But with the relaxation of lockdowns and the government’s move to encourage resumption of business activity, demand for metals has started going up. This has led to an upsurge in prices of metals throughout the world.

COPPER SURGE

With the spurt in crude oil prices, metal prices too have shot up. Copper prices in India have surged to two-year highs on strong demand from China. Factory activity in China, the biggest metals user, accelerated at the fastest pace in a decade. After touching $ 7,723, benchmark copper at the London Metal Exchange shot up to a 7-year high at $ 7715.50 a tonne - it had no takers at around $ 5850 over a year ago. In India, prices of copper used in wiring have surged to twoyear highs as producers struggle to keep up with strong demand in China. The MCX price has advanced to Rs 745 per kg. Of course, in the case of copper, India's fortunes have been fluctuating. In 2011, with a 50 per cent growth of the copper industry, India became an exporter of copper after being a net importer in the first decade of the new millennium. From the last year, India has again turned an importer after a private sector plant was closed down.

ZINC 'GALVANIZED'

Zinc output, exports and prices which had declined on account of the Sino-US trade war and the economic slowdown in 2019, were further hit by the breakout of the pandemic. But thereafter, usage of the metal, which is primarily used in galvanizing of steel products exposed to hard/fresh/ salt water, started improving fast. With a booming trend in steel, demand for zinc started rising and prices of the metal started charting a upward course throughout the world. On the London Metal Exchange, the price of zinc shot up to $ 2,986 per tonne and at home to Rs 228 per kg.

Demand for zinc has started rising at a fast pace in India. Till the first quarter of 2020, zinc consumption in India was dismal at around 0.5 kg per capita, as compared to 5 kg in China and average global consumption of 1.9 kg. But after the initial Covid19 shock, demand for zinc has started improving and now it has started rising at a rate of 8 per cent. Going ahead, the demand is likely to rise further and this will give a further boost to zinc prices which are quoted around $ 2,600 per tonne at present. On the MCX, zinc has risen to Rs 228 per kg.

VITAL LEAD

As far as lead is concerned, demand is steadily growing for automotive and industrial batteries. Of late, demand for lead is shooting up at the rate of 10 per cent, especially from rising demand for lead acid batteries for the replacement demand segment of the automotive industry, network expansion by telecom companies, implementation of smart grid project deployment of vehicle charging infrastructure, the thrust on hybrid and electric vehicles and growing installations of renewable energy systems. In the case of aluminium, an excess supply situation in the domestic sector is likely to persist for the time being as all the domestic smelters are operating at full capacity. The country will have to take steps to push up exports. Going ahead, power transmission, construction, automotive and packaging sectors will determine the demand for aluminium which is expected to move up at least by 4 to 5 per cent. Aluminium prices are also likely to rule firm. On the London Metal Exchange, cash aluminium is quoted around $ 2,475/2,505 per tonne. At home, the metal is quoted on MCX at around Rs 194 per kg.

WILL BOOM LAST?

The question that is making the rounds in trade, industry and market circles is: Will the current buoyancy in metals be sustained? Experts feel that viewed in the context of the continued rising demand for metals, their prices are most likely to rule firm at least for the time being - say, at least for a year or two. The buoyant trend in copper, aluminium, tin, zinc and lead will continue for the very near future but the potential for prolonged economic weakness remains a key source of uncertainty. This could undermine growth, weaken market sentiment and increase volatility in commodity prices.

In the event, a much-needed thrust on the country's health infrastructure, including vaccine coverage of the entire population at the earliest, is key to putting the Indian economy back in growth mode and, with it, sustaining the fortunes of the domestic metals sector.

(Pl. see the next issue for steel industry)