Global commodity markets have come under increased pressure for a variety of reasons including weak manufacturing data flowing from China and Euro zone, geopolitical tensions once again coming to the fore and currency market gyrations.

The choppy movements in the market culminated in broad-based weakness in commodity prices last week.

China is the focus of attention with January and February trade data coming under close scrutiny for new signals.

While it is generally accepted that the Asian major's growth will slow this year because of monetary tightening and weaker export growth, extant commodity trade data suggest continued robust imports in the first two months of the year.

It is important to note that global commodity prices have remained fairly stable in recent days after making early gains this year. However, the stability may prove deceptive when placed in the context of high geopolitical risks, reduced capacity to bear further oil price shocks, strong demand for many commodities (especially growth related ones such as crude and base metals) in emerging markets and unaddressed supply-side issues.

This combination actually points to the potential of a big price move to the upside from the current levels sometime in the ensuing quarter.

In the event, base metals are likely to make big price gains in the coming months, while oil prices could come under pressure.

Agricultural commodity markets are likely to stay firm in the first half and head lower in the second half with prospects of a crop rebound in the northern hemisphere.

On the LME, the entire base metals complex declined over the week. The market turned cautious with weak PMI data from Europe and China. The fall was heavy in lead (4.8 per cent) and tin (4.7per cent) followed by aluminium and nickel (3.8 per cent each), and zinc (3.6 per cent).

Copper showed resilience with decline of 1.4 per cent for the week ended March 23. Precious metals were not spared either, except for gold which gained 0.4 per cent week on week despite a weak sentiment.

Gold: In the last one month, the precious metal has lost as much as $100 an ounce with tactical investors scaling back their exposure to Comex gold.

On Friday the metal staged a rally with London gold PM Fix at $1,664 an ounce, up from the previous day's $1,636/oz. The yellow metal has regained its premium to platinum. Silver moved unlike gold with Friday AM Fix of $31.54/oz versus previous day's $31.79/oz.

The entire precious metals complex looks vulnerable in the near-term. For gold, physical demand has remained muted despite price declines. The expected support or a solid floor from physical demand has failed to materialize.

Fortunately physically- backed ETPs have held well with holdings at a record 2,445 tonnes, and gold coin sales in the US are reported to be healthy. However, on the Comex while non-commercial positions were reduced on the back of long liquidation, fresh short positions have been established.

In other words, the speculative positioning is lighter than before. Yet, softer global prices have not really benefited Indian consumers because of weaker rupee and higher import taxes.

The big news continues to be India where gold is taxed (customs duty, excise duty) from end-to-end covering imported raw materials (ores, concentrates), imported standard and non-standard gold, manufacture of jewellery both branded and unbranded.

Jewellery makers are protesting the heavy fiscal impost, but the government is unlikely to relent. There is also the possibility of investigation into gold imports and disposal during 2011. A slowdown in India's gold import is expected.

According to technical analysts, a decisive break below 1630 in gold would confirm near-term downside toward 1600 where there is the possibility of buying interest emerging. Silver looks bearish and a break below 31.60 signals extension toward 30.50 area. The medium term outlook is neutral.

Base metals: Prices remain under pressure as emerging pessimism over China seems to be pervading.

However, demand signals from other parts of the world are picking up as the US data show demand recovery and in Europe the worst may be over. Currently, conflicting signals from different parts of the world mean that the market lacks conviction.

If global growth signals continue to improve and China further eases its monetary policy, it may improve physical demand and trigger a return of risk appetite to establish long positions.

In the event, metals such as copper and tin which are in deficit this year have the largest upside price potential. Q2 usually tends to be a strong period for copper demand. According to technical analysts, there is reason to be bearish on aluminium and break below 2120/2145 area will confirm downside extension toward 2040.

For copper, a move lower toward 8175 can be expected and then the range lows near 8130. The medium term outlook is range.

Crude: The market continues to remain in a state of suspense with tug of war between demand and supply side forces. The current market fundamentals are characterized by low inventories and stretched spare capacity. Oil prices are likely to remain high on the back of emerging market demand and constraints on non-OPEC supply growth.

On current reckoning, Brent crude is almost certain to stay well above $ 100 a barrel and possibly in the $115-125 a barrel area for some time.

Technically, the picture looks bullish for the medium term.

gchandra@thehindu.co.in

(This article was published on March 25, 2012)
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