The Hindu Business Line : Industrial metals, agri commodities post gains

Incoming economic data - after Eurozone, now Japanese, Korean and Chinese - continue to raise hopes. Industrial metals and select agricultural commodities have registered handsome gains. Concerns about the financial system are easing. No wonder, the eternal favourite of investors, gold is falling back.

Swine flu and its threat did impact agricultural markets briefly; but weather concerns and fundamental factors are dictating the market direction.

Cotton showed an attractive gain in prices in recent days because of both supply side and demand side factors. The US acreage is set to shrink for the third time and revival of consumption demand may be on the cards.

Investors

Going forward, investors will have to stay cautious about the commodity they put their money in. For instance, it may not be advisable to continue to pour funds into base metals, many of which have run their course as far as prices are concerned.

Market fundamentals will soon begin to catch up. Where fundamentals looks weak (such as in aluminium) it may be a good idea to short the market. On the other hand, energy markets, especially crude, look positive on price prospects in the second half, going by likely tightening of supplies.

Currency continues to be a factor; but much less so. The recent volatility of the greenback seems to have impacted commodities much less than many anticipated.

While in general, a weak dollar should prove positive for commodity prices, there can be no sweeping generalisation about its effect.

Gold

Prices have failed to decisively break above the $900 an ounce level, although there have been brief forays above that psychological level. With equities market performing well, gold is no longer a safe haven investment.

Physical demand or the lack of it has also caused loss of buoyancy.

Given the price-sensitive nature of demand, any dip in prices is sure to provide buying opportunity. We saw last year, at around $850 an ounce, physical demand did emerge. Therefore, the downside will be limited on buying support.

The hype about Akshaya Thrithiya day in India failed to convince buyers. Admittedly, the volume of sales was less than that of last year, clearly evidencing the price effect. Higher prices simply deter consumers. For the yellow metal, investor interest is of course the key. While overall, such interest remains positive, we find a certain lack of investor interest in recent days. This should obviously stem the upward momentum to gold prices. The market could be range bound until there is a market moving development.

In the medium to long term, prices of the yellow metal have the potential for a surge upwards primarily because of widespread expectation of dollar weakness and build up of an inflationary environment. In the event, investors would return to the market and increase their exposure.

Base metals

China has been the mover and shaker of the complex with Chinese import demand dictating price direction. Clearly, low prices spurred Chinese interest to begin restocking. This surely impacted the prices of many base metals although the market fundamentals of some of them continue to remain weak. The demand surge runs the risk of waning soon, given the nature of purchases.

In the event the market could correct downwards sharply.

Copper and zinc may have the least downside because of the possibility of solid buying interest that may open up not too far below the current prices. Copper could find support at about $4,000 a tonne because scrap tightness continues to support physical balance and zinc at around $1,200/t.

On the other hand, aluminium and lead face the prospect of a sharp price fall as the price rise was overdone and less to do with market fundamentals.

Supply problems could limit tin’s downside to $10,000/t. On the other hand, nickel could be in danger of falling below $10,000/t if stocks rise sharply; but there would be selling opportunities around $12,000/t.