The Hindu Business Line : An upswing across the board for commodities

2005 could go down in India's post-liberalisation history as a watershed year that saw all the markets — equities, commodities and real estate — boom simultaneously. It is well known that the equity and commodity markets generally move in the opposite direction.

The rare phenomenon of markets moving together is evidence of the inherent strength of the country's economic fundamentals and may be attributed, albeit partially, to positive Government policies.

Interestingly, in the global market too, almost all markets showed robust growth during the year. Commodity trading showed much dynamism and buoyancy not seen in the last three decades. What moved the markets? Huge amounts of money chased commodities. Nature's fury in the form of cyclones and other calamities too created uncertainties in supplies and impacted prices.

"Commodity trading funds and Mother Nature teamed up to make markets swing wildly in 2005," commented an expert. Energies and metals were the star performers during the year. Crude oil went from $47 a barrel at the beginning of the year and peaked at about $70 after Hurricane Katrina struck and disrupted supplies. Natural gas more than doubled. The Metals complex displayed an amazing performance. Gold was a lustrous performer, crossing the psychological $500-an-ounce mark for the first time in nearly 20 years and peaked at close to $540/oz.

Obviously, the market moved not due to demand-supply fundamentals, but because of the huge following of funds and of course, concerns over inflation and geo-political uncertainties.

Among the base metals, copper put up a stellar performance. It shot up by over 70 per cent during the year to record rates above $4,500 a tonne. China's huge appetite for the metal propelled the market to dizzy heights. The zinc market too was in the upswing with the average price during the year rising by nearly a third.

Among the soft commodities, sugar was far from being soft. Encouraged by a huge demand for bio-ethanol to beat rising gasoline prices, the sugar market quickly moved northward with a massive support from funds. Now, towards the year-end, prices are nearing a decade-high. According to market observers, the sugar market has grown into one of the largest in terms of volume and open interest.

On the other hand, the oilseeds and vegetable complex was a treacherous commodity group that defied all prognosis of a bull run. Rising production, a sluggish off-take and an over-estimated demand projection for bio-diesel have all combined to keep the complex on a tight leash.

The commodity market in India has generally followed the global trend, be it gold, vegetable oil or grains. In line with world prices and compounded by a weakening rupee, gold made newer highs during the year. High prices resulted in a perceptible slowdown in demand. Indeed, scrap sales increased.

Amongst foodgrains, the wheat market remains firm with supplies tightening. Many are wondering whether the country would be forced to import wheat before the next crop (due by April 2006.)

After a year of low production and firm prices, sugar output in the season beginning October 2005 is expected to be considerably higher than in the previous season. Producer-friendly prices have improved the financial health of many mills, especially in the private sector. However, consumers are not better off. The days of sugar selling at Rs 14-15 a kilo are perhaps over. Oilseed and edible oil markets have been rather quiet with little volatility due adequate indigenous supplies, continuing imports and huge stocks of rapeseed/mustard with the Government agency National Agricultural Cooperative Marketing Federation of India (Nafed). Prices have generally been soft.

Commodity derivatives trading in 2005 showed robust growth, with the average daily turnover registering Rs 6,000 crore. Again, commodities of large-scale interest were limited — bullion, crude, and select agricultural commodities.

The Government has taken a number of initiatives to strengthen both the physical and derivatives markets. More investment is now flowing into the farm sector. The futures market regulator Forward Markets Commission has been promised autonomy and more powers.

Mutual funds and foreign institutional investors are likely to be allowed to trade commodity futures soon. Commercial banks too may follow suit. The desirability of some of the initiatives is debatable. On current reckoning, 2006 is likely to further consolidate the gains made so far. The commodity market is poised for further expansion. Derivatives trading is sure to gather further momentum in volumes.