Global Outlook

Indian commodity exchange have witnessed a volatile session since the start of 2012

Contributed by Nirmal Bang

The Indian commodity market has been hit tremendously by volatility and weakness in the rupee since the last quarter. In 2011, the rupee depreciated by almost 20%. It depreciated further by 10% in 2012.

Precious metals, non-ferrous metals and the energy complex in the Indian commodity exchange, which mirror the price fluctuations in the T international exchanges, witnessed a volatile session since the start of the year 2012.

Volatility in currencies and high frequency trading has made life difficult for commodity traders. All commodities are US dollar denominated. And the ongoing strength in the dollar is reducing the appeal for commodities globally. In fact, investment demand, which is one of the most important phenomenons since the last three-four years, has remained subdued since the start of the year.

BULLIONS

After posting a stellar performance last year gold and silver have disappointed investors, except in countries where currencies have remained weak as compared to US dollars. It raises a very important question in the minds of investors while investing in gold: which are the currencies that you would use to invest in gold?

Gold also rose in Japanese yen terms. But it increased only by 3.6% as Japan’s currency was one of the few to strengthen against the US dollar.

In developing markets, gold in Turkish lira moved up by 34.4%. In Indian rupee terms, it moved up by 28.8% and in South African rand, it moved up by 33.8%.

In countries where currencies have remained weak, gold has outperformed. The Chinese yuan started to take a more important role in the international monetary system. It has appreciated consistently since June ’10. In turn, gold rose by a more modest 4.3% in local currency terms during the year.

Gold has justified its status as a safe haven for countries whose currencies have depreciated very much. Gold prices in India have remained stable despite the sharp fall in international gold prices.

Gold Prices In India As Compared To Spot Gold In Dollar

The massive deviation has been caused by the depreciation of over 30% in the Indian rupee in the last one and a half years. On one hand, where prices corrected sharply internationally in 2012, prices rose on the domestic bourses.

Gold imports in value terms in the last 11 years have risen by almost 10 times, causing India’s current account deficit to widen. Custom duty on gold imports was raised twice this year and excise duty on gold was also introduced (which was later waved off), resulting in a massive nation-wide strike by jewellers.

The demand for gold in India, the largest consumer of the yellow metal, is suffering due to slowing growth, volatility in the rupee and a partly weak monsoon.

India’s gold imports have fallen sharply even in the second quarter of 2012. The fall in imports will be as high as 25% to 30% in Q2, 2012. Scrap sales is likely to remain high due to high gold prices in the country and slowdown in the economy. The Indian demand may shrink to 800 tonnes in 2012 as compared to 933 tonnes in 2011. In Q1, 2012, we witnessed a steep fall of 28% in the demand for gold. And most of the loss in demand was compensated by strong Chinese demand.

Under performance of stock markets, regulation and correction in property markets have also led to good investment demand for gold in China. There is a huge room for Chinese central bank to increase gold reserves with its foreign exchange reserves. It holds gold which is less than 2% of its reserve. This should move up in the years to come. Overall, due to a stable currency and low gold prices in China, we don’t see a major fall in the demand for gold and good support will be witnessed in physical demand if prices come down by $1,500/oz- $1,450/oz. In the short-term, we expect prices of gold as well as silver to remain under pressure.

BASE METALS

Prices of base metals have corrected sharply on the international bourses since the last two quarters mainly on account of the slowdown in China. We have seen a 20% to 25% correction in prices of most of the base metals.

Nickel remained a laggard amongst all base metals where prices have dropped from $22,000/tonne to as much as $16,000/tonne making it the worst performer in the base metals complex mainly on account of weak demand of stainless steel in mainland and in Europe.

Nickel market was negative since the last two years. But this year we have a surplus in the nickel market due to the rampant surge in production.

Copper prices plummeted from $8,800/tonne to $7,250/tonne due to weak import numbers from China, surging production of copper and weak demand. In China since the last quarter, inflation has started moderating due to which interest rates have been cut.

But the fact is these cuts won’t be enough to revive the demand. As slowdown in China is a prolonged problem and just by easing monetary policies the demand can’t be revived, we are not expecting any major rally in the prices of base metals. Due to some improvement in Europe, rallies should be sold in metals as demand remains weak. The outlook remains weak for the next quarter.

ENERGIES

Crude oil prices recently made a high of $88/barrel witnessing a brisk upward movement of 12%. Earlier this month we witnessed aggressive selling pressure in crude oil on weak global cues and poor fundamentals. However, we witnessed some gains on short covering following the steep fall in price and major support by renewed tensions between Iran and the west.

Five months ago, the EU declared it would impose an embargo on Iranian oil exports, effective 1st Jul ’12. Recently, Iran’s National Security and Foreign Policy Committee drafted a bill calling for Iran to stop oil tankers from shipping crude through the Strait of Hormuz to countries that support sanctions against it.

Also, the rate cut by the central banks of developed economies and liquidity infusion by BOE had lifted sentiments temporarily, which offset the gloomy manufacturing data from China, the United States and Europe.

On the supply side, OPEC is producing 6% more oil than the formal quota of 30 mbpd agreed at the group’s last meeting. Also, Non-OPEC nations like Russia and Canada have pledged to increase their oil production by 6,00,000 bpd, approximately reaching the levels of 53 mbpd in 2012 from last years level of 52.6 mbpd.

International Energy Agency (IEA) also reported that the global oil demand in 2012 would be lower due to the weaker economic outlook for developed economies. Lower demand and higher production would leave the oil market over-supplied for the coming months. We don’t expect crude oil to move up above $88-$90/barrel and on the downside again it can test $78/barrel.

AGRI COMMODITIES

Soybean prices have seen a sharp rise in both domestic and international markets, largely driven by anomalies in weather and tight supply scenario. Despite good soybean crop of 105 lakh tonnes in 2011-12, we are left with only 20 lakh tonnes of soybean to support the coming six months.

The weather condition in the prevailing season has not been very conducive so far due to the delay in the Indian monsoon. Robust export demand for Indian soy meal led to improved crushing in the domestic markets. Indian oilmeal exports rose to 3,05,335 tonnes in the month of June from 2,50,335 tonnes a year earlier. Soy meal exports, which shared the bulk of sales, rose to 1,80,987 tonnes in June, the third month of this fiscal year from 1,17,600 tonnes a year ago.

On the international front, the US has been tormented by extreme heat conditions, which has damaged the corn and soybean crop. The current heat wave hitting the US soybeans following small South American soy crop this year may mean that the global soybean, soy oil and soy meal supplies will be insufficient to cover the demand in the coming days.

United States, the largest soybean exporter has been expected to take over an even larger global soybean supply role in the coming months after the world supplies took a hit, due to the drought in Latin America. The USDA slashed its condition rating to 45% good to excellent, compared with 53% a week ago.

The focus would now largely remain on weather conditions in India and the US. Any further disruptions would mean tightness in world soybean supply and this would drive prices further higher in the coming months. We recommend a buying strategy in soybean august contract on dips to Rs.4,100/quintal - Rs.4,200/quintal for a target of Rs.4,500/quintal.