What happened to the Steel "Commodity Super Cycle"?
All views are personal and for educational purposes only, please do your own research before investing and trading
If you've been in markets for, say a bit more than a year, you'd have heard two things
"This time it's different" and "Commodity Super Cycle / Bull Run"
Chances are you also saw the low PE most steel companies were trading at and decided it was a superb idea
Assuming this was approximately a year back here's how you'd have performed vs. NIFTY
While NIFTY hasn't really don't well, steel cos were worse off
Why?
Well cause steel prices fell in the past year
But if you find that surprising, look at steel over the past 10 years
You'd see that steel prices have gone everywhere but also no where
The reason? well steel like most commodities is cyclical
Here's a business cycle diagram to understand this better:
The shape seems familiar, doesn't it?
You see the way steel cos, or commodity stocks in general make money is
Price * Qty
Prices have phases of slowdowns and rampant rise up based on demand and supply over time
Think how after covid there was massive infra spending while supply chains were blocked, the demand pushed the prices up drastically
The other aspect is Qty, or in other terminology, the "volumes" in production and sales, this is again cyclical in a way, but then companies can compete, win over contracts, acquire market share and all that
What this means is you could still see revenues of companies going up as long as they are able to have a higher growth in volumes than the price decrease
However, the unit economics would turn sour since they are making less money per tonne of production, which would affect their EBITDA and PAT
The reason is that most of these companies have very high fixed costs seeing as you got to run the factory as a whole, you can't really turn off furnaces, etc. leading to high losses when the prices fall
In a cooler financial terminology manner of speaking, the companies have high operating leverage - i.e they've fewer variable costs and more fixed costs
This is also why commodity plays are so profitable - you are producing the same volumes (sometimes more) but get a way higher price for no cost to you, directly hitting the profits
This bloating of the bottom line makes the PE fall to peanuts, the stocks rise like there's no tomorrow and then well the narratives start
Which is all cool, till the price starts falling as the demand gets fulfilled & more capacities are put in place to take advantage of the price rise
And then we get to where we are now, with some holding the stocks, hoping it'll do well soon, and then not holding till the next commodity cycle starts
Final Remarks
Now this isn't to say steel companies or commodity companies don't make good investments, some have outperformed NIFTY too in the past
Nor is this a recommendation for you to sell the steel cos
This is just to help you understand to not fall prey to narratives which are almost always price driven and do not consider what may happen next
Until next time, keep Manifesting Wealth
PS: Here's my tweet from Feb highlighting about steel prices back in February
https://twitter.com/Ary_Mulchandani/status/1495038193615265792?s=20&t=D4Cn-QaHhJVJW3oI8Az-9A
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Disclaimer: All above views are purely for educational purposes and are not to be taken as investment advice. Investment or trades taken of any kind based on this are solely the person’s risk and I bear no liability. Please consult a financial advisor before making any investments. All investments are subject to market risks.
Website:Â Manifestwealth.in
Twitter:Â @Manifest_W
LinkedIn:Â Manifest Wealth
Sources:
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