The Hindu Business Line : Commodities perform well in first quarter

Looking ahead
External factors such as inflation, broader economic concerns, geopolitical tensions and Fed rate easing are likely to drive gold prices to retest $1,000/oz.
There is unlikely to be any marked relief from high crude prices anytime soon.

G. Chandrashekhar

Mumbai, April 6 Commodities performed rather well in the first quarter of 2008, with prices increasing by an average of 15 per cent across the board. Be it energy, metals or agriculture, the markets witnessed considerable volatility and price spikes.

Interestingly, precious metals and agriculture were the strongest performers — with most commodities in the two groups up by about 20 per cent. In case of base metals, the threat of recession in the US created widespread anticipation of base metals prices falling, which encouraged many investors to go ‘short’; but the market surprised them because of fundamentals.

Simply Bullish

Aluminium, copper and tin posted impressive performances quarter-on-quarter, while those with the least attractive fundamentals — lead, nickel and zinc — actually fell. Clearly, the message is, during times of uncertain outlook, fundamentals will play a critical role in driving the market. Those with strong fundamentals are more likely to post price performance on a scale better than those without.

Even within the commodity group, there would be differences in performance. In other words, investors have to be selective when investing in commodities, instead of being simply bullish on commodities as a whole.

Gold: Despite dipping to below $890 an ounce, gold prices closed above $900/oz during three days of last week. All precious metals were boosted by a depreciating dollar. On Friday, London PM Fix was $905.50/oz, up from $896.50/oz the previous day. Silver followed suit. Friday AM Fix was $17.45 versus $17.15 an ounce.

Gold prices have been buoyed by investor interest and this is likely to remain the key price determinant this year.

Supply side interruptions are likely to provide additional support to the market. The US economic data and their impact on the greenback will have to be monitored closely.

Overall, market fundamentals remain finely balanced and external drivers are positive. Even with the dollar stabilising at recent levels, investment demand remains strong. External factors such as inflation, broader economic concerns, geopolitical tensions and Fed rate easing are likely to drive prices to retest $1,000/oz, according to analysts. Therefore, it would be advisable to buy on dips.

The extent of price rise in the international market may not be fully reflected in India, because of slowing physical demand and strong possibility of the rupee appreciating further in Government’s efforts to curb inflation.

Platinum: As for platinum, the nature and extent of South African power shortage that brought production to a halt for five days in January are unlikely to be resolved in the short term, given the operational and capacity constraints, pointed out an expert report. Platinum supplies are heavily dependent on South Africa. The delicate power supply situation and mine safety concerns leave mine output extremely susceptible to potential disruptions.

Base metals: The complex exhibited considerable volatility over the past weeks.

The sentiment towards base metals is mixed and there is wide variance in views as to how it will play out. Demand side and supply side factors both operate in the market. On top of market concerns is the economic slowdown in the US. However, continued robust performance by major Asian economies may neutralise the adverse effect on metals.

Low stocks in copper, lead and tin are seen exacerbating market nervousness and limiting the downside when prices come under pressure.

The cushion to face supply shocks is getting thinner. A pick up in physical demand is seen as a strong possibility. Copper is at risk of tightening further through the second quarter, when deficit is set to rise, inventories return to all-time lows and prices test all-time highs again. Strong emerging market demand for lead and continued supply constraints are seen providing a solid base and the risks to further price spikes remain high. Nickel prices are set to firm on increased activity in stainless steel, while tightening fundamentals in tin will push the market up.

Aluminium is at most risk from slowing future production due to its energy intensity and higher energy costs. In the near future, global balance is seen tipping into deficit and in Q2 physical demand would resurface, which could send prices higher.

Crude: The market is truly volatile; but overall, prices seem to be consolidating at over $100 a barrel. Relatively weak US job data on Friday once again raised macroeconomic concerns.

The OPEC output is expected to continue to remain defensive despite high prices. Supply growth is sluggish, while demand is robust, with Chinese consumption more than making up for weak OECD demand.

There is unlikely to be any marked relief from high crude prices anytime soon. If the US economy begins to recover from Q3 as many expect, it would be bullish for the energy market.

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