Are Commodities and Stocks Closely Correlated? A Comparative Analysis
Are Commodities Correlated to Stocks?
During Russian Ukrainian crisis, You might have observed when crude oil prices were on the rise, Stocks such as Asian paints and Berger paints kept making lower lows. No doubt, Commodities correlate stock prices, both positively and negatively, depending on the industry and the specific commodity in question.
Various factors may affect stock prices in a particular sector. Commodities are key raw material or input for many companies in that sector. The cost of these commodities can have a significant impact on a company’s profitability and, in turn, its stock price.
Since we are learning the correlation between commodities and stocks, we must know what Input Sensitive Stocks and Output Sensitive stocks are.
Input-Sensitive Stocks: Input-sensitive stocks are stocks of companies that are heavily impacted by changes in the cost of their inputs or raw materials. These inputs may include commodities such as oil, metals, or agricultural products, labor costs, and energy prices. Input-sensitive stocks are often found in manufacturing, construction, and transportation industries.
For example, Automobile companies will get affected by the rising price of Rubber, Steel, Aluminium, and energy. Their profitability will reduce by increasing the cost of these commodities since their cost of production and transport will increase.
Output-Sensitive Stocks: Output-sensitive companies depend on the price of commodities for their revenue and profitability. These companies include those involved in producing and selling raw materials such as metals, energy, and agricultural products. The prices of these commodities can significantly impact the earnings of these companies. Rising commodity prices will increase profitability for such companies.
Consider this example, If Russia is a Gas Company, and due to some global factors, prices of Gas increase, who will benefit the most? Now You Got it.
Oil And Natural Gas
Oil is a key raw material used in the production of paint. An increase in Oil prices increases the cost of production for paint manufacturers. Rising oil costs may lead to decreased profit margins for paint companies and, in some cases, force them to raise their prices to offset the higher production costs.
If the price increase is significant, it could discourage potential customers from purchasing paint, decreasing its demand. All of these factors could hurt the stock price of paint companies.
Companies such as Oil and Natural Gas Corporation (ONGC), Oil India Limited, and Reliance Industries Limited (RIL) that are highly output-sensitive. These companies’ earnings depend heavily on the price of oil and gas, which can be impacted by global supply and demand factors, geopolitical events, and other factors. Above is the chart of Hindustan Zinc and Zinc Future chart. Look how both prices move in sync.
Metals - Gold, Silver, Copper
Mining – Companies in the mining sector, such as gold and silver mining companies, can benefit from rising precious metal prices, increasing their profitability and driving up their stock prices. Recenly India discovered Lithium mines. Which companies do you think will profit?
Jewelry – Companies in the jewelry industry can benefit from rising gold and silver prices, as these metals are used to make a wide variety of jewelry products.
Electronics – Companies in the electronics industry, such as manufacturers of electronic components, may also be affected by rising copper prices, as copper is a key raw material in producing many electronic products.
Agricultural Commodities
India is a major producer of agricultural commodities such as rice, wheat, and sugar. Companies such as Tata Coffee Limited, ITC, Renuka Sugar, KRBL, and Godrej Agrovet Limited are involved in producing and selling agricultural products. The rising price of Agricultural Commodities will bring more profits for these companies.
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Great post 👍
Great post. Prakash steelage looks very good. I am holding it too but now will add more quantity.