Metals are mirroring the rally in crude oil and the recent output cuts are helping
- Metal company stocks were rallying up to 5% today on rising prices of the commodity after crude oil prices hit a two-month high.
- Analysts say rise in input cost due to high crude oil prices and low production capacity at sites have increased the prices of metals, which is good for the company.
- Nifty Metal is the top gainer among sectoral index with 2.6% gains.
AdvertisementWhile the outlook for steel makers remains cloudy, the weakening of the dollar is propping up commodity prices including metals as well as crude oil.
When the dollar weakens, the same amount of any commodity costs more in terms of dollars. Therefore, prices increase. And, the stocks of metal companies are mirroring that optimism.
Nifty Metal is the top gainer among sectoral index with 2.6% gains. Metal prices are said to be rising because of high crude oil prices and lower production with companies, which is boosting the prices upwards.
(Prices as at 1 p.m)
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Relation between metal prices and crude oil prices
“There are reasons for the rise. One is that metals stocks are always linked to crude oil prices and, right now, they have jumped $84 per barrel, which is probably at a recent high. Usually when crude prices go up, base commodity prices also go up, which is a good thing for metal companies,” said Deven R Choksey, managing director at KR Choksey Investment Managers told Business Insider.
Currently, the crude oil prices are at $85 per barrel, trading at a 2-month high after the US oil inventory fell for the seventh straight week to levels last seen in 2018.
Note that crude oil is a basic input in the production process and is used to fuel cars and planes for transportation and generate electricity for use in production of goods and services. So any change in the price of oil will impact the costs for the company and hence increase the product price.
Another reason for the rise in metal prices is that companies had cut down production in recent weeks because they thought the demand wasn’t strong enough. “Anywhere across the globe particularly Europe production capacities at being pared, they (companies) are not increasing the production be it because of environment issues or covid related restrictions. Many companies have been keeping their production capacity at a lower level, which is resulting in higher prices of the product due to shortage of supply,” added Choksey.
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