The ongoing tension in the Middle East has changed many business equations globally. Its impact is reaching the economies of many countries. According to a report by the famous global brokerage firm CLSA, the turmoil caused by the war has put important metals like aluminum and steel on a new front. Commodity prices may remain high for a long time due to disruption in supply chains around the world. But the interesting thing is that amidst this global crisis, a big and profitable opportunity is arising for Indian metal companies, especially Vedanta and Tata Steel.
Panic in aluminum market
The Middle East region handles about 9 percent of the world’s total primary aluminum capacity. It is about 6.9 million tonnes and a large part of it is exported. Due to the war, there is a deep crisis looming on this supply chain. The CLSA report warns that a major smelter there has already stopped its production. Shutting down and restarting any aluminum plant is a very expensive and lengthy process.
Experts are comparing this situation to the European energy crisis of 2022. If there is further disruption in gas supply, there could be a severe shortage of aluminum in the global market, causing its prices to skyrocket. This will have a direct impact on the cost of automobiles and construction sectors.
Vedanta will benefit the most
When there is an international shortage of raw materials and energy becomes expensive, those companies that are able to source the raw materials they need themselves (backward integration) gain the most profits. CLSA believes that Vedanta is in the strongest position in this matter. The company’s business is spread across many sectors like aluminium, zinc and oil. Because of this, they can sell their products at higher prices without external pressure. On this basis, the brokerage has increased the fair value of Vedanta’s shares from Rs 835 to Rs 1,030.
Hindalco will get less profit
On the other hand, aluminum giant Hindalco will get limited benefit from this boom. In fact, Hindalco has already hedged a large portion of its future sales at old and low prices. Apart from this, rising gas prices in Europe are expected to have a direct and negative impact on their overseas production units.
Tata Steel becomes a safe bet
The story of the steel sector is a little different and deeper. Due to the war, freight has become expensive and global trade routes for coking coal (coal used in steel making) are changing. In this environment, Tata Steel is emerging as the biggest winner. The biggest reason for this is that Tata Steel has its own iron ore mines, which protects them from the shock of rising prices of raw materials.
At the same time, companies like JSW Steel and Jindal Steel have been advised to be cautious. These companies are more dependent on imported coal and their profits may fluctuate due to heavy debt. However, due to safeguard duty on imports in India, Europe’s new carbon tax (CBAM) and ban on production in China, steel prices will not fall below a certain limit.
Disclaimer: This article is for information only and should not be considered as investment advice in any way. TV9 Bharatvarsha advises its readers and viewers to consult their financial advisors before taking any money-related decisions.