Base metals: avenues to diversify

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The recent but consistent growth in world GDP has seen higher consumption of ferrous and non-ferrous base metals, leading to an increase in investment focus in these commodities. Between the two, base metals have been investment favourites with commodity-specific as well as diversified funds due to consumption patterns, worldwide listing and high liquidity. The leading exchange in the world for non-ferrous base metals is the London Metal Exchange (LME).

In India, on the NCDEX, the only ferrous commodities listed are mild steel ingots and sponge iron, both of which do not have sufficient volumes. Similarly, though MCX has iron long, steel flat and sponge iron, there is lack of volume which deters serious players.

But in non-ferrous base metals, MCX has aluminum, copper, zinc, nickel, tin and lead, of which copper has very good depth and liquidity and the volumes are better than even gold on most days. The others don’t fare too badly either. NCDEX has followed up in base metals with copper, aluminum, nickel and zinc and is trying to reposition itself as a non-agri exchange to make up for falling volumes.

In general, it can be said that base metals are bullish largely due to growing industrialisation worldwide, led by Asia (mainly China and India), Russia and Brazil.

Growing economies have an insatiable appetite for metals as they have diverse uses. Developing countries too are moving towards being developed economies and per capita consumption is expected to increase accordingly. We must keep in mind that the world GDP growth has also doubled to about 4.5% in the last few years, and the BRIC countries, though among the fastest growing, are not the only game in town. Construction and power industries lead the demand for aluminum and copper. At such times of high demand, even minor supply constraints get exaggerated. In any case, there are limited resources and it also takes time to bring new production to market. The rise in prices will fund technological breakthroughs required as more money will go into funding new technology to fulfill growing needs. One significant change in the last few years has been that commodities have become an accepted asset class. This has led to higher investment demand as more and more funds are parking money in commodities in a bid to get higher returns as well as diversify their portfolio.