Will the stagnant demand in commodities encourage hedging

Shyamal Gupta | Updated on March 26, 2014


The market may be responsive to fundamentals rather than any momentum trading

The commodity market, which had defied gravity during the last few years, is showing signs of slowing down.

It is not a breather but a shift to a bear cycle.

No doubt the “investors” have vanished and the herd mentality has gone out.

The standard explanation during the period of price surge was that the booming demand, particularly from China, was clashing with stagnant supply of energy, metals and agricultural produce. Talks of stagnant or falling demand are now in the favour.

The bull phase saw “weight of the money effect” where the participants took positions so large compared to overall position that they could move the prices.

However, with money becoming scarce for such activity, the market is likely to become more responsive to market fundamentals rather than any “momentum trading”. Even an oilseed trader who would have tried his hand on the trends of the gold or crude market during the last few years will increasingly restrict himself to core business by avoiding such daredevil acts.

During the past decade, “financialisation” of the commodity market had almost destroyed the information flow of the physical market adjustment mechanism. Commodities which became “basket of assets” will now be viewed more for its uniqueness and S&D (Supply & Demand) gaps.

Businesses involved in the origination, processing, merchandising, trading, handling, storage and shipment of commodities will get a flip compared to the companies who were promising investors with short terms large returns.

The acceleration and amplification of the price movement which was witnessed in the market during the last several years have come down substantially during the last six months in almost all the commodities.

The changed scenario would also encourage the long term hedge requirement of physical players in the futures market who need not be worried about frequent variation margin calls.

Companies in the physical commodities domain are likely to react to such situations by consolidating specialisation and getting back to the fundamentals of business.

As the saying goes often in commodity market “Bears will make money. Bulls will make money. Pigs will get killed” would be proven correct once again.

(The writer is the Chief Business Officer of NCML. Views are personal.)

Published on March 26, 2014

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