Commodity Trends: Has Spring finally arrived?

February 07, 2009

Commodity Online
Financial Times reported that hints of spring in commodity markets this week was visible on hopes of a rapid revival of Chinese economy. This resulted in gains for base metals and a dramatic rebound in shipping costs.

The Baltic Dry Index, the benchmark for freight costs for dry bulk commodities such as iron ore, coal and grains, jumped 53.5 per cent over the week, helped by signs of a pick-up in Chinese demand for iron ore as steelmakers depleted their inventories, FT reported.

Oilmeal exports from India dropped in January on poor demand and emergence of South America as a serious competitor in the global market. According to the Solvent Extractors Association of India, oilmeal shipments slid to 5.63 lakh tonnes from 8.39 lakh tonnes (lt) during the same period a year ago.

The annual Wholesale Price Index-based inflation rose 5.07 per cent in the week ended January 24, lower than the previous week’s yearly rise of 5.64 per cent. Inflation was recorded at 4.78 per cent during the corresponding week of the previous year.The official WPI for ‘All Commodities’ during the latest reported week declined by 0.2 per cent to 230.1 points, from 230.5 points for the previous week. Commodity group-wise examination shows that the decrease in overall inflation in the latest reported week reflects a general decline in all the three commodity groups versus inflation rates in the week ended January 17.

Precious Metals
The bullion pack continues to be the exception amongst all other asset classes as it continues to trade positively on the back of negative global economic data and declining investors risk appetite. It is majorly the concerns of declining risk appetite amongst investor’s class, worsening global economy and bearish stock markets, which is leading investors to invest in gold, the safe-haven asset. Also, investment in gold - particularly through purchases of physical gold in the shape of bullion - has been on the rise in recent months.

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Also, it is well understood that from a longer-term perspective, the stimulus plans by the global economies & likewise printing of money shall lead to devaluation of the currencies which will lift gold prices. Also, buying interest has increased tremendously from wealthy investors/funds so as to diversify their portfolios. The strong demand is being mirrored among professional investors whose funds are buying gold and shares of the companies that produce it. As prices have been unable to breach the major resistance levels of $930 - $933 (Spot Gold), we are witnessing profit booking at these levels.

Only a sustained trading above $933 mark will only lead to the next leg up. Gold is a “the obvious counterweight” to currencies. Spot Gold can face resistance around $935/955 levels, whereas crucial support is seen at $890/875. MCX April Gold can face resistance around Rs.14640/14890 levels, whereas support is seen at Rs. 13940/13550 per 10 gram.

Crude Oil
Crude Oil prices are trading range bound, as expectation of oil production cut by OPEC, which supplies more than 40% of world oil, is keeping floor under prices, while the upside is capped by lingering concerns over macroeconomic situation. Weekly inventory data has shown once again a sharp rise in crude oil stocks and fall in US energy demand amidst rising unemployment and falling consumer spending. Crude Oil inventory is rising on account of lower refinery utilization and weak demand. US auto sales plunged to its lowest level since 1982 in January, reducing demand for oil.

US Economic data has shown that weekly jobless claims have increased to 27 year high amidst deteriorating economy and worsening job market. All these factors are pointing towards bleak economic outlook and its negative impact on oil prices. In recent times, oil prices have also taken cues from equity market, viewing it as an indicator of the status of the economy. Oil prices are trading in contango, where near month contract is trading at discount to next month contract, indicating that rising oil inventory is likely to keep prices of near month oil futures under pressure. Crude Oil prices are expected to trade in the range of $35 and $45 in the short term. . MCX February Crude Oil futures have support at Rs. 1920/1780 and resistance is seen at Rs. 2250/2340 per barrel.

Rubber
Rubber markets continue to be weak as automobile demand fails to pick up in most countries. RSS 4 Sheet rubber dropped to Rs 68.25 from Rs 68.50 a kg on Thursday. The trend was mixed. RSS 4 slipped at its February contract to Rs 68 (68.61), March to Rs 68.84 (69.72), April to Rs 70.10 (70.95) and May to Rs 70.95 (71.90) a kg on National Multi Commodity Exchange (NMCE).
The week began with demand continuing to be subdued in the physical market. But a mixed trend was visible on Thursday with a better closing in international markets. But global cues failed to cheer the traders in the absence of quantity buyers from leading consuming industries. Rubber is expected to go range-bound with a weak-bias in the near to medium term as the outlook is expected to improve only by 2009 end.

Pepper
Pepper market continues to be bearish on weak global demand although domestic demand was quite high. Despite the cues from the futures counter, physical markets also eased by weekend. Pepper futures hit the lower circuit level (the maximum limit allowed to drop in a day) on Friday on strong bearish activities. The prices at the terminal and upcountry market traded weak. At Kochi terminal markets, it was offered at Rs.12200 per quintal for garbled variety and Rs.11700 per quintal for ungarbled, down by Rs.100/qtl as against prior session. Trading was affected as arrivals were then. Out of the 20 tonnes arrived, 15 was sold, traders said.

Overseas buying interest for the Indian origin remained subdued as Indian parity continued to remain high at $2600/tonne f.o.b. Internationally, the prices remained steady, and Vietnamese ASTA grade was offered at $.2500/tonne and BASTA was offered ay $2200/tonne. Pepper at the physical counter is likely to trade range bound during the days ahead on the back of limited activity.
Meanwhile, in view of the high parity and consequent decline in exports, Indian pepper trade has asked the Union Commerce Ministry to reintroduce the Vishesh Krishi Upaj Gramodyog Yojana (VKUGY) in view of high cost of production and high domestic demand.

Base metals
Base metals will suffer from the economic worries as economies around the world are suffering; there was this illusion of decoupling, that only the U.S. would suffer, but that’s been proven wrong. Still, government spending may help to revive the economy and boost copper demand. The U.S. Senate is considering an economic stimulus package that tops $900 billion. The House passed an $819 billion stimulus plan last week, supported by President Barack Obama. Also there are hopes that the Chinese State Reserve Bureau will continue to buy as it is believed to be planning to increase its state reserves to a million tones compared with around 300,000 tones now and South Korea also plans to boost base metal reserves ahead of an expected economic recovery later this year.

Production cutbacks have failed to match the pace of demand destruction and inventories have soared to 15-year highs, with copper stocks breaking above the half a million tone mark for the first time in 5-1/2 years today. Metals are caught in the opposing forces of global demand continuing to shrink and the somewhat optimistic attitude toward the stimulus plan.

Soybean
Soybean futures surged about 6 % during the last week on account of firm overseas market and higher prices of domestic soy meal. The USDA lowered Argentina’s production estimates to 42.50 million tonnes yesterday versus the USDA official January 49.50 million tonnes. The USDA will issue updated Supply/Demand and Crop Production reports on Thursday on Tuesday. The Buenos Aires Grains Exchange put the Argentina’s soybean crop at 34.5-38.20 million tonnes. President of Argentina declared an agricultural emergency due to worst drought hit in decades. He announced in a press conference that the decree will exempt thousands of farmers from paying of various levy and taxes for one year to help them.

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Argentina’s farming provinces Buenos Aires, Santa Fe, Entre Rios, Cordoba, La Pampa, Chaco and Santiago del Estero, have been worst hit by the drought since at least 1971.These provinces cultivate a large soybean crop. Argentina is one of the world largest exporters of soy meal and soy oil.

Farmers organizations pressurized the Argentina Government to declare agricultural emergency to reverse export tax hike. India’s oil meal exports for the month of January, 2009 reported to 5,63,273 metric tonnes (down 33%) as compared to 8,39,392 metric tonnes during the same month last year. India’s oil meal exports for the period April 2008 –January 2009 (10 month) is reported at 46,16,486 metric tonnes (up by 21%) compared to 38,25,410 metric tonnes during the same period last year. NCDEX Soybean (March Contract) has a support at 2255/2100 and resistance is seen at 2480/2550 levels in this week.

Sugar
After a rally of almost Rs. 175 per qtl in the last 3 weeks, Sugar futures fell during the last week on expectations that the supplies would increase in the domestic market after the government approved the proposal for duty free imports of Raw Sugar. India’s move for duty free imports allows mills to import Sugar for local sale on the condition that a similar quantity of refined sugar is exported within two years. It replaces the earlier policy, called "Grain to Grain", under which the importer was obliged to refine the imported consignment and export it. Also, the Centre is planning next to announce an extra free sale quota (FSQ) release of 4.25 lt for the current quarter, including two lt in Feb and 2.25 lt in March. This is over and above the already released 50 lt released for the quarter January 2009- march 2009.

Despite approval for duty free imports and expectations of additional quota to be released for the current quarter, Sugar prices will remain firm in the short term on forecast of lower output in the domestic markets. The average recovery in UP so far this season has been a 8.80 % against 9.48 % in 2007-08. If the combined sugar production of UP and Maharashtra end up at 90 lt, against the latest official estimate of 110 lt – India’s total output could dip below 170 lt. This is against 263.28 lt in 2007-08, which included 90.65 of Maharashtra and 73.19 lt of UP. This might keep Sugar prices bullish in the medium term.

Jeera
Reports of lower production and beginning stocks of 2009 is supporting the prices to remain firm. Prices at the spot markets in the previous week were quoted at steady to slightly higher rates of around Rs. 11,300- Rs. 11,500/qtl. Beginning stocks of jeera till the end of March of 2.5 lakh bags to 3 lakh bags(1 bag=55kgs). Jeera futures March contract after making a high of Rs. 12,425/qtl. are now trading in range bound manner. There are reports of dew and fog in the jeera growing areas of Gujarat and Rajasthan. Jeera crop is in the seed formation stage. Dew is harmful at this stage of the crop. Further, the yield of jeera would be impacted. Prices may find support initially at Rs. 11,660/qtl. and thereafter at Rs. 11,400/qtl. Resistance may be seen at Rs.12,430 and then at Rs. 11,400/qtl.

(With analytical support from Angel Commodities, Mumbai)

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