Diwali bonanza: Commodities give dhamakedar returns

Rajalakshmi Nirmal Chennai | Updated on November 13, 2020

Strong Chinese buying and global crop loss provided support to prices


Investors who bet on commodities during last Diwali have seen their portfolio returns rocket up.

The sharp recovery in the metals space with strong Chinese buying, weakening of dollar and large crop destruction following floods and locust attack that saw food prices shoot up across the world, have helped. The commodity that delivered the most return was crude palm oil – the futures contract of CPO in MCX is up 55 per cent between October 27 last year and now. The other commodity that was close to a similar record was mustard seed. The NCDEX mustard seed contract is up 42.5 per cent in the last one year.

From the non-agri side, it was silver that added sheen to the portfolio with a return of 36 per cent from last Diwali to now; gold was the second best with a return of 30 per cent.

Crude oil and mentha oil were the worst performers from the commodity basket. In last one year, they have fallen 24 per cent and 21 per cent, respectively.

The rally in CPO is thanks to the dramatic run in prices in the commodity in Malaysia.


Crude palm oil on fire

Though there was demand destruction due to closure of the restaurants and cafes during Covid-19 lockdown, the supply destruction in oilseed was even sharper. Loss of soyabean crop in the US, fall in inventory of soyabean in Brazil and then drop in sunflower seed output in Russia and Ukraine due to unfavourable weather conditions stoked prices of crude palm oil. It was supported by a sharp rise in demand in India and China.

Also, the rally in crude oil prices was a positive and it saw Indonesia on track to implement its B-30 mandate. The USDA reports show that the 2019-20 (October-September) global production of CPO is likely to be down by 1 per cent, with Indonesia making up loss of production in Malaysia to a large extent. While consumption for the year has also estimated to be lower, the closing stock has been projected at 10.7 million tonne, i.e. down 3 per cent over last year.

Silver shines

As in every rally of precious metals, this time too silver did better than gold. Despite its demand being driven to a large extent by industrial users, the white metal rallied since the Covid-19 scare began to spread in March. Being relatively inexpensive compared to gold and investors in the West and Europe having the option to invest in silver ETFs, the metal saw lot of inflows from investors seeking safety. The weak dollar and depreciation in rupee, helped returns further for domestic market investors.

Crude oil – party pooper

In the commodity party, crude oil played the spoilsport. Lower demand for crude oil after the outbreak of Covid-19 and increase in inventories, are the reasons behind drop in prices in the last one year. The production cuts by OPEC didn’t help prices much.

The world is likely to end 2020 with a drop in demand of about 8.8 million barrels a day, as per IEA estimates.

Published on November 13, 2020

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