Commodity Trends: Concern over bearish pepper

February 28, 2009

Commodity Online
India is just Rs 75 crore short of the Rs 4,350 cr set for 2008-09 and has achieved exports of 3,72,125 tonnes against the targeted 4.25 lakh tonnes. Therefore, this target looks achievable, according to Spices Board. This is possible not on account of higher volumes but the fact that rupee has depreciated sharply against the dollar.

However, global pepper market faces the greatest challenge with regard to pepper which has seen prices plummet the highest since 2006. Three years ago it was the glut in global market that led to fall in prices but now it is the world wide fall in demand due to economic crisis.

The turnover of the commodity exchanges in the country rose by 29.74 per cent to Rs 4,393,403 crore during the current fiscal till February 15, though trading in agri-commodities showed a drastic drop, according to the Forward Markets Commission (FMC).

Turnover from bullion trading grew by over 75 per cent at Rs 24,45,963 crore during the review period, it said. Giving details of the fortnight performance of the commodity bourses, FMC said turnover of 22 exchanges during February 1-15, rose 3.50 p er cent to Rs 2,33,143 crore.

Precious Metals
Bullion prices corrected sharply last week as Spot Gold was unable to hold above the $1000 mark. Profit booking was witnessed at higher levels as prices had moved up substantially over the past few weeks. Persistent risk aversion amidst weakening global economy & safe haven demand, had earlier led to sharp rise in precious metal prices. Risk trend shall continue to drive movement in gold and silver prices in the coming week. Investment demand has picked up greatly as other asset classes continue to remain risky. Also, the Dow Jones has breached its 12 year lows and currently trades around the 7200 mark. SPDR gold trust, largest gold ETF increased its gold holding above 1000 tons.

Physical jewellery demand at these prices can remain subdued but investment demand shall continue to be robust unless we see a revival in the global economic scenario which does not seem that likely in the near future. This can be gauged by the data released last week, wherein Japan's industrial production fell by 10% in January 09 - the biggest monthly drop since records began more than half a century ago. Further, already 3.6 million jobs have been lost since the U.S. recession began in December 2007 marking the biggest employment slump of any economic contraction in the postwar period.

Currency movements, particularly the unprecedented weakness in the Rupee is also supporting the bullion prices. In the short term, spot gold prices can face resistance around $975/$997 levels, whereas crucial support is seen at $918/$890. MCX June Gold can face resistance around Rs.15950/16315 levels whereas support is seen at Rs. 15020/14565 per 10 gram. MCX May Silver has support at 21400/20550 levels whereas resistance is seen at 22900/23500.

Crude Oil
Crude Oil prices witnessed a sharp increase in prices last week as US Weekly Inventory data showed a rise in gasoline consumption in US, lead by a more than expected fall in gasoline stocks. US Gasoline consumption during the past four weeks was 8.99 million barrels, up by 1.7% from a year ago. Further, inventory levels at Cushing, Oklahoma have also decline marginally. Earlier in the last week, Iran, Venezuela and Iraq had stated that OPEC is prepared to lower production again when the group meets on March 15th. This has further helped in prices firming up.

From a medium term perspective, the bearish picture for Crude oil consumption is still in place. With economic conditions still worsening across the major oil consuming nations, demand is unlikely to increase in the medium term. All major oil organizations are reducing their demand forecast for this year, also signifying the fact that world economy can take longer than expected time to recover from current crisis. Firm dollar against major currencies can also put pressure on oil prices. Grim economic data across major nations is raising concern over the health of global economy. NYMEX April Crude Oil prices are expected to trade in the range of $38 and $52 in the next week. MCX March Crude Oil future has support at Rs. 2070/1860 and resistance is seen at Rs. 2370/2490 per barrel.

Rubber
In India, rubber prices ruled steady to weak even as global markets witnessed recovery on a falling Japanese Yen. Towards weekend the physical rubber markets turned to a steady mood but active buyers and sellers were absent from the markets. This led to RSS 4 closing at Rs 70 per kg.

The March futures for RSS 4 improved marginally to Rs 70.20 (69.86), April to Rs 71.50 (71.12), May to Rs 72.45 (72.01) and June to Rs 72.89 (72.01) a kg on National Multi Commodity Exchange (NMCE). During the mid-week, rubber prices weakened in physical markets as demand from consuming industries continued to be weak.

Natural rubber futures climbed to a one-week high on Thursday in Tokyo, as a weaker Japanese currency versus the dollar boosted the appeal of yen-denominated contracts. Prices rose as much as 3.8 percent, gaining for a second day, as the yen declined to a three-month low before reports this week that may show Japan’s recession is deepening. Rubber, used in vehicle tyres, trades globally in dollars and the futures often move in the opposite direction to the Japanese currency, Bloomberg reported. For the near term atleast no positive sentiments to lift rubber Futures and spot markets is visible.

Base metals
Copper prices have found strong support as there are expectations of a rise in demand for the metal. But overall fundamentals still remain weak as we expect a recovery in prices post 2HFY2009. Aluminum inventories are gaining sharply and this factor is putting pressure on prices. The other base metals too face a situation of rising inventories coupled with poor demand.

Expectations of pick-up in demand from China and a bout of technical buying and short-covering is helping prices to trade higher. However, there is no sudden shift in fundamentals and we expect prices to remain under pressure during 1HFY2009 and a revival could come in 2HFY2009.

Also, the situation of rising inventories could change in the second half on the back of a pick-up in Chinese buying as the stimulus package of $586bn is spread over a period of two years and is focused on infrastructure development. In the coming week, we feel that base metal prices could rise if the US Dollar weakens. However, this rise in prices could be followed by a bout of technical selling as fundamentals still remain weak and are expected to improve in 2HFY2009.

Soybean
Soybean prices surged sharply in the beginning of last week (more than 7%) on the possibility of strike in Argentina, because Govt. of Argentina has refused to lower soybean export tax by farm group/exporters. But, farm group is still approaching the government and trying to resolve this issue through talks. Current soybean export tax is 30%. However, prices could not sustain at higher levels and fell slightly during the later part of the week on profit booking.

Recent USDA’s weekly bearish export sales figure added bearish market sentiments. Cancellation of 1,44,000 metric tonnes of soybean exports to unknown destinations also provided support to bears. Net sales of soybean were at 339400 tonnes for the current marketing year. Net meal sales were 145600 tonnes, all for the current marketing year. Meal stocks were 447000 short tonnes, higher than expectations. Soybean prices are expected to move range bound with weak sentiments of global market and lower export demand of domestic soy meal at prevailing prices. NCDEX Soybean (March Contract) has support at 2215/2150 and resistance is seen at 2400/2435 levels in this week.

Turmeric
Lower carryover stocks and revised lower production estimates are supporting the prices to strengthen. Carryover stocks are around 6-7 lakh bags. Other reports even projected carryover stocks of 4-5 lakh bags and production of 41-42 lakh bags. In the short term i.e. (end of February 2009), prices may take cues from the fresh arrivals of the Turmeric in the domestic market. Once the fresh arrivals of turmeric gain pace in the domestic market, prices may be pressurized and the effect may be seen in the futures. Revised estimates of Turmeric production for the year 2009 is further lowered to 43 lakh bags as compared to 45 lakh bags projected earlier in January 2009.

This may support the prices once the demand from the domestic and overseas market is placed in good quantity. (1 bag=70 kgs). Prices at the spot markets were quoted at steady to slightly higher rates due to reduced arrivals. Futures prices touched a high of Rs.4,479/qtl and thereafter traded in a range-bound manner. Prices have strong support at Rs.4,325/qtl and thereafter at Rs.4,125/qtl. Prices may witness resistance at Rs.4,520/qtl and thereafter at Rs.4,604/qtl.

Jeera
Jeera production in 2009 is expected to be lower at around 22 lakh bags as compared to 25 lakh bags in 2008. Carryover stocks are lower at around 2.5 - 3 lakh bags in 2009 as compared to 9-10 lakh bags in previous year. Demand from the overseas as well as domestic is present in small quantity but is expected to surge in the coming weeks. Harvesting of Jeera in Gujarat has commenced and Rajasthan will start from second week of March 2009.

Weather still would play a crucial role in determining the prices. If rains take place, then the standing crop would be affected. Arrivals of jeera in the domestic market have surged in the week to around 18000 bags (1 bag=55 kgs) as compared to 6-7 thousand bags in the week ended 21st February 2009. Though the arrivals have picked up in the domestic market similar offtakes can be consequently seen due to aggressive stockists buying. Prices in the futures market shall find support at Rs.10,950 and thereafter at Rs. 10,780/qtl whereas resistance is seen at Rs.11,390/qtl and then at Rs.,11,660/qtl.

Pepper
Prices of pepper continued to be affected by weak domestic and overseas demand. This gets reflected in Futures and spot markets. In the weekend the prices at upcountry markets remained un changed while at Kochi markets the prices declined and were offered at Rs.10800 per quintal for garbled variety and Rs.10300 per quintal for ungarbled. Around 43.3 tonnes were sold for the arrivals of 40 tonnes. Indian parity eased further by Rs.80/tonne and was offered at $2200/tonnes. On Tuesday, Pepper Futures fell sharply on reports that Indian market woud be flooded with imported pepper from Vietnam which influenced the Bears to pull down the market. Vietnam being aggressive in the international market due to competitive quotes may pressurize the prices at the domestic. Overseas buyers are thus buying from Vietnam market.

Pepper production in the Indian subcontinent for the year 2009 being steady and the availability of Pepper being lower may support the prices once the fresh orders are placed from the overseas market. Under the given situation pepper at the physical counter is likely to trade range bound to weak during the days ahead.

Sugar
Weak demand from retailers led to subdued sentiments in the domestic market even as there was good supply from the mills.
But, the government's decision to impose restrictions on the quantity of sugar a trade can hold to check hoarding weighed on the market sentiment. Union Agriculture Minister said that sugar production likely to be around 16.5 MMt over earlier estimations of about 18 MMt and much lower than last year's output of 26.3 MMt.

Sugar mills, which started crushing late this year, are closing operations two months ahead of season as cane supplies dwindle, hurting output already seen down. Currently, India has contracted for 1 MMt of imports to help meet the shortfall and another 500,000-1 MMt of imported sugar is possible. Moreover, the duty-free import of raw sugar may have little impact on prices due to delay. As well, NCDEX sugar M stocks were steady at 27,552 Mt in their warehouses as of Feb. 26. Out of the total volume, 21428 Mt are in Kolhapur and 789 Mt are in process of trading. In Pune, 6124 Mt are in stock. Sugar S stocks were stable at 2273 Mt in Kolhapur and 1776 Mt are in process of trading. Despite frequent government intervention to curb rising Sugar prices it may not decline as global fundamentals support the bulls.

(With analytical inputs from Angel Commodities, Mumbai)

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