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Journalism of Courage
Two weeks before the stock and commodities meltdown began, there was a warning that could not have escaped the attention of markets.
The warning came from the world8217;s second richest man who made his billions from betting in the markets. 8216;8216;In metals and oil there8217;s been a terrific price move. It8217;s like most trends: At the beginning, it8217;s driven by fundamentals, then speculation takes over. As the old saying goes, what the wise man does in the beginning, fools do in the end,8217;8217; said Warren Buffett.
On May 15, when the BSE Sensex crashed by 463 points 8212; the first in a series of big falls that sent the Sensex tumbling by 11 per cent 8212; the trigger came from the sell-off in metals market as forecast by Buffett.
The fall in overheated metal prices last week was the first sign that all was not going well in the global markets.
Metal prices had zoomed to dizzy heights following the sharp rise in demand, largely from China and other thriving markets like India, Russia and Eastern Europe. The price of copper had risen more than 80 per cent this year and zinc climbed 70 per cent. Aluminum rose more than 25 per cent so far in 2006. Even silver prices almost doubled in a year and gold rose by over 50 per cent.
8216;8216;I think this downturn can be called a correction as the metal market had been overheated for the past few days. But I don8217;t think that this is a matter of concern. The downturn in the market will give the players time to consolidate,8217;8217; Uttam Galva Steels director Ankit Miglani said.
However, equity markets are worried whether the latest metal trend is an indication of any change in the global growth trends. 8216;8216;A major reason for the Bull rally in stocks in the last one year was the rise in commodity prices. Of course this was driven by the higher economic growth in various emerging markets. All these markets are inter-linked8230; We don8217;t know whether real estate and other markets will get hit,8217;8217; said stock dealer Pawan Dharnidharka.
Though some analysts refuse to believe that the metal party is far from over, they admit that signs of economic slowdown in the US and rising interest rates could change the scenario.On top of this, analysts are wary of 8216;8216;demand destruction8217;8217; where high prices dampen demand and can also lead to supply substitutions.
Hedge funds and speculators who earlier targeted currencies pumped money into metals. The weakening of the dollar added to the metal speculation with funds reaping rich dividends from metal trading.
Party over?
In India, shares of metal companies like Sterlite, Nalco 0and Jindal led the top losers last week with the Sensex plunging by a whopping 1,347 points. The BSE8217;s Metal Index was the biggest loser among various sectoral indices with a fall of 21.7 per cent.
Economists see a pattern and linkage in the fall in equity and metal markets. Moody8217;s economist Paul Guest said it was 8216;8216;hard to say8217;8217; if the sell-off signalled the end of the market rises. 8216;8216;The sell-off actually started in emerging markets assets last week, special commodities this week and it is now affecting equity markets all over the world,8217;8217; he said when global markets fell on Thursday.
8216;8216;Though metal prices have undergone a healthy correction, they are expected to increase in the near future. The demand for the metals is genuine as world economy is buzzing, never mind a few hiccups,8217;8217; says Sushil Sinha, regional head, Karvy Commodities.
Analysts say a clear picture will emerge only in several months as a demand slowdown or downturn in the economy will take months to take shape. Besides, China 8212; which consumes nearly one-fourth of metals 8212; is yet to give any indication that its manufacturing sector is witnessing any slowdown.
However, smoke signals are coming from the US, the largest economy in the world. Interest rates have shot up in the US, keeping local asset prices under pressure. US consumer prices are also rising faster than expected, provoking concern even on Dalal Street.
8216;8216;The risk of inflation coming from higher energy and oil prices has increased now, fuelling fears about raising interest rates, which in turn will slow the economy. This will lead to a slowdown in the metal demand and prices will fall,8217;8217; said an analyst with a US investment bank.
The Indian industry is far from worried. On the contrary, some aluminium companies raised prices last week after London Metal Exchange prices fell by nine per cent. For Metal Inc in India, demand is still strong and profit margins are high.
For equity markets, the fall in commodities means a recovery could be a tough job. And even tougher if other asset classes like real estate take a cue and tumble.
Buffett has already warned that real estate market is also overheated. Is anyone listening?
8211;george.mathewexpressindia.com
