Commodity demand has continued to remain strong in many cases in the first quarter of the year; yet, there was a halt to the upward momentum of prices last month for a combination of reasons including the tragic natural calamity in Japan, continued geopolitical instabilities in the MENA region and concerns that China would further tighten its monetary policy.

Despite all these, last week, commodity prices firmed. Gold has set new highs even as silver has re-tested its 31-year highs following again a combination of reasons including resurfacing of European sovereign debt crisis, MENA region unrest, inflation fears and uncertainties relating to Japan. Even the rate hike has had little effect. Brent crude moved above $120 a barrel; yet, producers did not react. Agricultural commodities such as corn, soyabean and cotton spiked.

Meanwhile, iron ore shipments to China slowed heavily in March making it difficult for mills to restock without pushing prices higher. No wonder, Chinese steel prices pushed up strongly following gains in spot iron ore prices. In addition to slowing shipments from Brazil, exports from India were also down last month. According to Chinese trade data for March, iron ore shipments from India were 9.9 million tonnes (mt), down from 10.7 mt in February.

While shipments from Orissa were down sharply at just 972,000 tonnes compared to 1.5 mt in February, Goa shipments were up to 7.2 mt from 6.8 mt in February. “As Orissa supplies higher-grade material and Goa typically supplies lower-grade material (more so since the Karnataka iron ore ban made it illegal to transport higher-grade iron ore from Karnataka to Goa for blending), the result has been a reduction in the overall grade of material leaving India to China”, an expert report pointed out.

Recently, the Supreme Court ruled that the Karnataka ban on iron ore exports will have to be lifted from April 20. “The rolling off of this ban will not make a significant difference to the demand/supply balance for iron ore in the near term”, the expert commented.

It is as yet unclear how the monetary policy of various countries will unfold in the coming weeks as inflation expectations are running high. ECB may have set the ball rolling by effecting a rate hike of 25 bps. In addition to the commodity market fundamentals, one needs to closely monitor currency dynamics, macro data, inflation numbers, geopolitical development and of course weather for agricultural prospects.

Gold: Setting a new high, the investors' eternal favourite rode on a combination of supportive factors including resurfacing of sovereign debt risk in Europe. The metal reasserted its safe haven status.

On Friday in London, PM Fix was at $1,470 an ounce, up 0.7 per cent from the previous day's $1,460/oz.

Silver showed a stellar performance by rolling into the 40s. On Friday, in London AM Fix was at a new high of $40.22/oz, up 1.8 per cent from the previous day's $39.51/oz. Although the price performance has been impressive, silver's market fundamentals are not as compelling as gold's. Silver market is in a 5,000 tonne surplus in 2011; and therefore, when investor interest wanes, there could be sharp downward correction. So, one cannot wish away volatility.

Base metals: The complex ended the week on a robust note with further dollar weakness coupled with the return of confidence in Chinese demand pushing prices up. All metals rose strongly. Copper was up 2.1 per cent to above $ 9,850/tonne and aluminium hit a 2011 high of $ 2,683/tonne. Over the week, nickel led the way up 7.9 per cent week-on-week.

Looking ahead, going long in copper may make sound commercial sense, while aluminium too is seen gradually rising because of rising cost of production and anticipated higher energy prices. Price outlook for lead is also looking increasingly favourable with imminent supply constraints. World's largest lead-only mine in Australia is indefinitely closed.

Crude: Prices have moved up relentlessly over the past many weeks; and the prospect looks unabated. Demand conditions are strong as ever. The current prices are driven by supply outages, continued high geopolitical risk and strong demand. Uncertainty continues to surround the MENA region unrest.

Interestingly, oil producers have not yet reacted to prices touching $120 a barrel. There is therefore speculation that the market may seek higher levels towards $130 a barrel.

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