This is Why Metal Stocks are Falling

Hello friends, this is Vijay Bhambwani here, and in this video, I am going to address a concern which I am sure must be a top of the mind recall of most traders and investors. Why are base metals, which are industrial metal, prices falling? And what do we do now about our stocks, which are concerning base metals? Aluminium, steel, iron ore, copper shares and allied industries?

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May I draw your attention to the market screenshot that you're seeing on your screen? As I record this video on 28th of October, I want to bring to your attention the market watch of 27th and 26th of October 2021.

Do note how sharply, industrial or base metals have declined, in the MCX exchange floor and now multiply the market lot say of Aluminium.

If you are reserve member of Equitymaster and/or somebody who attended the Equitymaster Conference of January 2021, I would strongly suggest you do, even if you are not a member, you do attend this conference, I shared with you a very simple anecdote of how I discern metal prices far away from research reports, far away from what is being discussed in the mainstream or social media.

I'll come to that later. But let me draw you attention to the videos that I have recorded in the past on the metals supercycle, as the market calls it. On fifth of March, I recorded a video which, all these videos available in the playlist if you just border to scroll down in this playlist, now on fifth of March video titled A New Supercycle in Metals? 26th May 2021, Is the Commodities Supercycle Real? 16 June, Shadow Inventories in the Commodity Markets, and 7th July, Is the Metals Bull Market Over?

Now these four videos, along with others that I have recorded, dealt specifically with what is happening to metals prices. I have admitted in these videos that the bull market in metals is for real, which means the prices are going up.

Now the reasons are a lot of unbacked currency sloshing around in the market, waiting to get invested somewhere so it can earn profits. Number two. Covid based restrictions, which is residing in supply disruptions. Number three. Labour strife in many of these mining companies.

If you are connected with me on social media, you would've heard or read my rants on what's happening in Latin America. Now most people don't understand why this guy called Vijay Bhambwani is going on and on and on about Latin America, Middle East, North Africa, parts of Southeast Asia, and parts of Asia Pacific.

Now less take Latin America. If you were to know your metals, you would instantly realise that majority of Latin American countries are also resource rich economies. They basically export metals. What happens and they are financially distressed. They are under huge amounts of debt with international financial institutions. What happens when you're a exporter of metals and your economy is under distress?

You sell what you have, what God gives you in terms of natural resources, to export your way out of trouble.

This is an element that many analysts forget. They tend to extrapolate that if prices went up 10% in one month, in six months from now, they will be up 60%, in 10 months from now, they will be 100%.

Linear extrapolation is a fallacy in statistics and definitely a fallacy in financial markets. It's a grave risk that you're posing just because you've seen some amount of rally or decline and then you say, one year from now, based on this number, this is where the prices should be. A certain cause of a death of a trader.

Secondly, in the video that I made on 16 June Shadow Inventories in Commodity Markets, this will address the issue of why LME stocks are falling in terms of copper, nickel, lead, zinc, Aluminium, etc. WYSIWYG, what you see is what you get, is a myth in financial markets, which is why you should basically be listening to the traders. Traders, I don't mean commodity traders or stock traders are mean people who actually deal in commodities.

Now let me quote the anecdote, which I shared with Equitymaster's Conference participants. In 2018, Donald Trump imposed sanctions on a company called Rusal. It's Russia's Aluminium Manufacturing and Exporting Company, and it is responsible between 6 to 8% of the global supply of aluminium.

The markets thought aluminium was running out of this world and they started marking prices higher and higher, and to my horror, I will not name names, but CEOs of companies came out and started saying aluminium will go to 225, to 250, 300 rupees a kilo.

I decided to investigate and I went to places like Daru Khanna, Masjid Bunder, Reti Bunder, and other areas in Mumbai. Now Daru Khanna does not mean a wine shop or an area where alcohol is made. This is very simply Asia's biggest scrap metals market.

What you basically do if you're a trader in Daru Khanna, is you sit outside a ramshackle, huge godown and you buy scrap metal. Shavings, filings, bits and pieces, edges, corners, strips, everything. You basically buy this scrap melt it, make it into a virgin metal, sell it at a profit.

I decided to go out there and start asking my contacts in Daru Khanna, Masjid Bunder and Dana Bunder as to whether they were buying scrap metals, especially, aluminium, at those fantastic prices. You know what? All of them, almost all of them, told me it would be suicidal to buy scrap at that price, spend more money on it, to melt it, and convert it to bars ingots, sheets, whatever, and sell it in the market and this time around, do understand that fuel prices are significantly higher, so smelting and melting costs are much, much higher.

This time again, I have been in touch with those guys, and they have been telling me what I think I knew. They were not buying metals at those prices. Fantastic prices in the scrap market. So one reason why metals were expected to come down was the people who actually deal in those metals knew something was wrong and they were not buying at those prices.

Latin America flooding the markets with metals, out of sheer distress to pay their way out of debt is another factor. Now, why are stocks like in Hindalco, Tata Steel, SAIL, NALCO, Jindal Steel, etcetera, etcetera, falling?

Hey, they mirror the price of the commodity. Now this is where there is a loose co-relation. Why do I say loose? Because this is where the difference between equities and commodities step in. In commodity markets, both demand and supply are almost infinite. So you dig deeper into Mother Earth and extract some more commodity. But in equities, demand and supply is not linear.

The paid up capital of a company is static. You can stimulate demand by screaming buy across all media houses and entice people to buy stocks. So stocks can continue to rise even though the economy might be not doing great, which is called counter cyclicality in economic theory.

So stock markets have been basically going against the grain, and what you are seeing in terms of metal stocks, is gravity playing its part. Is the metal bull market over? I don't think so. Maybe there will be a good enough correction, and then money will start to flow in and hey, you can't fight the inflow of money. You can fight the flood of money.

I don't know whether money will come in here after, as I recorded this video on 28 October, but metal prices, I can assure you on not in a super cycle. That is a theory concocted by people who have no exposure to metals themselves because the traders who run their houses by buying the scrap metal, melting it, and selling it back again, are not buying at the stupendous prices. This is not happening, which is why you are facing extreme amount of volatility in your portfolio of cyclicals. Cyclicals would mean metals and other companies associated with metals.

So even if you are not trading commodities, even if you're not bothered at all about commodities, please do not ignore the prices of aluminium, nickel, lead, zinc, and copper, for the simple reason that your portfolio of stocks dealing in those medals, their prices depend on the underlying asset, the raw material, which is commodities.

I keep telling people who are who care to listen to me that we traders are brain warriors. We fight our battles with our ideas, not with the fast internet connections and higher refresh rate of a mobile trading terminal or a desktop trading terminal and higher leverage offered by brokers. We win and lose with our ideas.

So be particularly careful about whose ideas you are allowing to impact your mind. If you want to listen to the guys were actually dealing in the scrap metals, they don't seem to be as gung-ho as people in the public domain seem to be, and this explains to you why you need to be extra, extra cautious, keep your stop losses diligently, and not take this market for granted.

It's not a one way ticket. It's not a one way rally, and I do admit it's a bull market but prices will go up and come down. But supercycle? I don't believe in it. I have given you enough dates, starting from 1st March 2021, where I have been saying it's a mere bull market and not a super cycle.

In a super cycle people will gladly buy at whatever prices they are told buy. This is not happening at Daru Khanna, Masjid Bunder, and Dana Bunder. This is Asia's biggest scrap market, and it's telling you, stop. So this is something that should be telling you was happening to your portfolio of metal stocks.

Let's be careful out there. I am not calling it the end of the world. I'm not calling it the end of a bull market but you definitely need to pay attention, keep your ears to the ground and hear the signals of the horses approaching your battlefield.

On this guarded note, I bid goodbye to you not before reminding you to click like on this video, if you agree with what you saw. Subscribe to my YouTube channel if you haven't already done so. Click on the bell icon to receive instant alerts about fresh videos being put up out here.

Good, bad or ugly, I love to hear from you in the comments section and help me reach out to fellow like-minded investors and traders by referring my video to your family and friends. On this note, I bid goodbye to you. Thank you for your patience. Have a very profitable day. This is Vijay Bhambwani signing off for now. See you again in my next very soon. Bye.