G Chandrashekhar

Calm times ahead for commodity markets

G. Chandrashekhar Chennai | Updated on November 15, 2017

World commodity markets – energy products, base and precious metals as well as agriculture - have generally traded in a narrow range in recent weeks with no fresh trigger to provide a decisive direction. Last week was no different. Although at high levels, crude oil market witnessed range-bound trading as geopolitical tensions seem to be easing. Base metals prices too have been trading in a tight range simply because global growth concerns have not disappeared yet, although positive signals are emerging.

While gold received a small little boost following FOMC decision to keep policy unchanged but reaffirmed its guidance for rate expectations, platinum and palladium were weighed down by demand concerns and possible slowdown in China. Gold gained 1.3 percent week on week, while silver performed poorly with 2 percent price loss over the week. Agriculture faced a mixed week. Soyabean prices reached the highest level in about four years while ICE sugar prices dropped to 11-month lows.

Global crude steel consumption is expected to expand by 3.6 percent in 2012 to 1,422 million tons according to a short-term outlook by Worldsteel which expects a further 4.5 percent growth in 2013. While Chinese growth is expected to be 4 percent, the US growth outlook of 5.7 percent is seen highly encouraging. In 2013, the US crude steel consumption could rise to about 100 million tons.

There is general expectation that the commodity markets would face calmer times in Q2 under normal conditions. No fresh catalysts are visible on the horizon. Sustained flow of positive macro data would help boost the sentiment. Commodities with constructive fundamentals are sure to benefit.

Gold: The physical demand for the yellow metal has remained lackluster, especially in the world’s largest consuming market. However, the decision of FOMC to keep policy rates unchanged but affirming its guidance for rate expectations provided some support for gold last week. In London on Friday the PM Fix was $ 1664 an ounce, marginally up from the previous day. AM Fix of silver was $ 31.14/oz.

Although the macroeconomic setting is still gold positive, the physical market demand needs to improve and investor interest has to revive for prices to move higher. Physically backed ETP demand is steady. At present there are no strong catalysts. The US dollar is less-supportive. Equity markets are seen improving. In India, a weak rupee is pushing gold prices higher which at last count crossed Rs 30,000 per 10 grams.

The government is under pressure to contain foreign exchange outgo on gold imports. There is strong likelihood that the Finance Minister may not succumb to lobby pressure but do his best to maintain status quo in terms of tariffs and duties. Sellers are eager to liquidate stocks and are said to be giving discount of over one percent.

According to technical analysts, gold looks bullish as the recovery off 1625 points toward the 1700/1717 area. Silver looks to be headed towards 32 in the near-term where selling may take place. The medium term outlook is neutral.

The palladium market is in a state of deficit. With expectations of strong improvement in US and Chinese demand – from the auto catalyst makers – prices are seen to have an upside potential.

Base metals: The complex generally closed the week strongly with copper and aluminium rallying on Friday. Tin ended up 4.7 percent week on week while copper gained 3.9 percent. Reports suggest that copper stock overhang in China may ease over the next two months. This is driven by improving end-use demand, easier credit and lower refined imports. That said, however, in Q2, the base metals complex is generally likely to face headwinds in the form tepid Chinese demand. How soon demand conditions improve and erode domestic inventories remains to be seen. In these uncertain times, the market lacks conviction.

Crude: Demand growth in OECD region, except Japan, is weak while non-OECD demand is muted because of slowdown. Supplies on the other hand are gradually picking up. No fresh catalysts are seen to break range trading in the foreseeable future.

Published on April 29, 2012

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