JPMorgan’s Top Picks In Commodities

Metals are fundamentally best positioned among metals, cement and energy stocks, according to JPMorgan’s Pinakin Parekh.

Investors should go with buying metals as its producers are better placed with high energy prices, Parekh, executive director-metals and mining, oil and gas, cement, told BQ Prime’s Niraj Shah. “When energy prices stay high, metals’ cost of production stays high. So, metal prices would also remain high.”

For energy stocks, Parekh said, “You are better off staying with refiners, especially those who export.”

Investors, according to him, should stay with businesses that have maximum upside risks to commodities and lower regulatory risks. In India’s energy sector, policy becomes a big overhang, thus impacting the stock prices.

Volatility in commodity prices, Parekh said, is inherent and expected to continue depending upon consumers’ re-stocking and de-stocking. “The commodity price cycle has now reset higher, of which we are at lower end.”

While JPMorgan doesn’t forecast a decline in oil prices and expects to remain between $90 and $100 a barrel, Parekh flagged prices of non-oil commodities as a “problem”.

The prices of non-oil commodities such as gas, diesel and coal could remain firm next year if Europe fails to revive supplies, he said. “If Europe’s supply situation does not ease out of Russia and the winter is ahead of us, then we could see prices remain strong, which will impact demand.”

For this year, however, storage in Europe has been taken care of, assuming a normal weather. In case of a colder winter, all bets are off, Parekh said. Europe will then try to source gas in the spot market which will spike LNG prices.

Non-oil commodities such as coal are domestically priced in India. 15-20% of buyers, who rely on imported and spot prices, surely cannot compete at this point in time, Parekh said. So for these players, he said, the easiest way would be to “back down”.

He said this could accelerate if the situation in Europe does not ease anytime soon.

According to Parekh, the cement stock prices indicate that the markets believe there would be a possible consolidation. Fundamentally, however, that seems unlikely.

Historically, the cement sector has seen M&A activities when it is under stress, but now among the listed players, very few are holding debt, which is manageable, he said.

The demand outlook for cement, he said, is very strong. Cement producers are rapidly expanding their capacities over the next two-three years. “This is the highest ever we have seen in the last 15 years or so.”

Every cement stock is trading at a near-life time in terms of EV/Ebitda, Parekh said, keeping a ‘neutral’ view on the sector. The stocks are pricing in a lot of earnings momentum and rerating.

But the risk-reward, according to him, is not favourable at this point in time owing to breakdowns in terms of supply not coming through.