Commodities

Growth commodities hit hard by virus

G Chandrashekhar | Updated on March 06, 2020

Commodities that have a strong positive correlation with economic growth – popularly referred to as ‘growth commodities’ – have taken a real beating because of the ongoing coronavirus (Covid19) epidemic that now seems to be assuming global proportions and has triggered genuine fears of substantially slowing economic activity.

Energy commodities such as crude oil and natural gas as also industrial metals such as steel, copper and aluminium have faced downward price pressure in recent days as global commodity trade is disrupted, global value chains are undergoing changes and there is palpable loss of demand.

Gloomy sentiment

The sentiment is rather gloomy as even now there is little evidence that the virus is coming under control. If anything it is seen rapidly spreading outside of China in countries such as South Korea, Italy and Iran, not to speak of suspected cases in many other countries, including India. Not only commodity markets but stock markets too are falling in the wake of uncertainties about the future, fear of slow growth, reduced trading activities and loss of demand. Central bankers around the world are doing what they are equipped to do – loosening the monetary policy and dropping interest rates with the hope that it may help arrest falling growth rate.

Crude oil market has taken a hard hit following the ongoing negative sentiment over economic growth. Restrictions on travel and tourism have exacerbated the sentiment. No wonder, Brent has fallen below $50 a barrel, a level unthinkable at the beginning of the year.

As yet it is unclear how OPEC+ will respond to the current situation. Whether the talk of further output cut will fructify into concrete action is a matter of conjecture as Russia is reportedly not in favour of any further output cut.

Base metals complex too has faced the Covid19 curse. Collapse in Chinese demand and surge in exchange stocks have prompted a sell-off. Even as financial investors exited, the base metals complex received a fortuitous boost in the form of the US Federal Reserve announcing an emergency rate cut of 50 bp.

After shedding $ 200 a tonne to trade at $5,570/t end of last week, copper saw a small rebound. Many analysts have lowered their forecast for base metals. However, the Chinese stimulus package is sure to bring some relief. The Asian major’s construction sector as well as power grids will see investment trickling in, boosting demand for steel, copper and aluminium.

Notwithstanding the likelihood of coordinated policy action, the ongoing uncertainties have cast a long shadow on global growth prospects. If the epidemic is largely contained by April or around and the sentiment improves, then it will open up the possibility of a rebound in the markets in the second half of the year.

However, if the epidemic were to morph into a real pandemic in the months ahead, the risk of global recession lurks as it would further stymie global trade, destroy demand and skewer growth. In which case markets may face further downside risks.

Gold glitters

One commodity that has benefited from the current risk-off environment is gold. However, extreme caution is required in trading gold. After long years, gold bulls are having a field day. Some analysts are announcing outrageous forecasts of the metal touching $2,000 a troy ounce.

There is too much of speculative froth in gold that can disappear faster than it has accumulated. The yellow metal’s physical demand is rather subdued, especially the world’s two largest markets China and India. So, a correction can come sooner than many can imagine. It is certainly not the time to buy, but may be time to book profit and exit the market.

The writer is a policy commentator and commodities market specialist. Views are personal

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Published on March 06, 2020
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