Backwardation in Metals & ESG

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 Article 3: backwardation in metals, Source: economic times and live metal

  • What is backwardation? Backwardation means when the current price of an underlying asset is higher than prices trading in the futures market.
  • The reason behind this tight supply is majorly lockdown due to the covid-19 pandemic. Hence supply chain got disturbed.
  • The supply chain has multiple aspects like labor, transportation, regulatory authority, etc. The majority of the countries have initiated Go green activities, for example, China. They decided to reduce pollutions by closing the copper melting activities. As a result, the supply chain got disrupted.
  • Another reason is, because of the pandemic, a hit to a transportation activity, and people being locked in their houses for a long period, they started spending crazily after the lift of the lockdown. Hence demand rose crazily and businesses needed to do Capex. For CAPEX, metals are needed and it is in short supply. Therefore backwardation started.
  • Because of all this shortage and disruption in chain supply, high demands led to a sudden increase in the spot price of metals.
  • Generally, there is a contango in the market. Contango is a situation where the future price of the commodity is higher than the spot price of the commodity but for the first time in over a decade metals industry are facing tight supply leads to backwardation
  • But as the situation is softening, its spread (difference between the futures price and spot price) is tightening. 
  • Here the key learning is whenever there will be supply chain disruption, it will be crazy lucrative to invest in the metal industry as it is a commodity business and commodity businesses have a high price transfer phenomenon.

Article 4: Environmental social governance (ESG), Source: economic times

  • How does environmental social governance work? The basic fundamental of ESG is to reward a company that rewards the environment or society.
  • Companies like ITC who majorly produce tobacco and companies that produce crude oils have been given bad ratings by ESG.
  • ESG score is generally decided based on certain qualitative factors and the weightage of each qualitative factor. 
  • Food companies also have certain identified health risks, mentioned in their offering documents, like obesity, diabetes, tooth decay, cardiovascular disease, high cholesterol, etc. Therefore ESG's bad rating could impact them but as of now only companies who are harming the environment according to the ESG are under the lens, not food industries.

·         In this article, the company’s PE ratios are being compared indicating that this company deserves this much PE according to ESG rating and whatnot, but comparing one stock’s PE to another stock’s is completely wrong, you can’t compare.

·         The main point is that the growth of such companies is not solely dependent on ESG rating. Also, companies who produce alcohol and cigarettes are highly taxed by the government as the consumers won’t be able to afford these products and ultimately the demand will reduce. Hence many factors come into consideration not just solely ESG rating.

ESG | FinnacleShahClasses


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