Commodity Trends:Heightened activity in Futures

January 24, 2009

Commodity Online
Heightened activity is now visible on the commodity Futures in India on the back of increased volumes in trading. Indiabulls announced that it's exchange in partnership with MMTC will go live in the first quarter of next financial year while Forward Markets Commission stated that they have set up a committee to probe the alleged irregularities in the demutualization of the Indore-based regional commodity bourse NBOT.

Meanwhile, the Centre’s downward revision of sugar output estimates for 2008-09 by 40 lakh tonnes is likely to increase speculation in prices this year even as the government has decided to import raw sugar to meet the shortfall. India’s growth forecast for the current fiscal again slipped to 7.1 percent as against earlier prediction of 7.7 percent in the wake of deteriorating global economic outlook.

Reversing eight weeks of consecutive decline, the annual wholesale rate of inflation increased from 5.24 per cent to 5.60 per cent for the week ended January 10.The increase has come mainly on account of ‘primary articles’, with the year-on-year increase in the wholesale price index (WPI) for this group going up from 10.85 per cent to 11.64 per cent during the period under review.

Precious Metals
Gold prices rose in the last week, as increased safe haven demand amidst global economic slowdown has supported rise in yellow metal prices. Spot gold touched a low of $823 and bounced back sharply to the high of $880 per ounce.

On macroeconomic front, data from US, Europe and Japan is showing bleak economic outlook. Traders are concerned over deteriorating economy, and are looking out for safe assets like gold. The current price movements indicate an indecisive market which is pinning its hope on Barack Obama for some miracle, which is not very likely, given the current state of global economic crisis.

Gold continues to trade positive, retaining its shine amidst all the turmoil taking place in the global financial markets as the realization sets amongst investors that the current crisis is not going to go away soon. And in such times, it is also Gold that is the winner. The currency movements, particularly the Dollar, will continue to set the future direction. Earlier, crude prices were influencing the bullion pack, which is not so in present times given the low prices of crude. Hence, it is primarily the currency factor coupled with risk perception that shall drive the bullion pack in coming weeks.

Silver continues to track both gold & base metals, as partly as an investment class and partly because it being an industrial metal, correlated with base metal prices which have also fallen over the past few days. Spot Gold continues to meet with resistance around $890 levels, whereas crucial support is seen at $825/oz, closing below that may lead to further fall in prices.

Rubber
Without any visible change in fundamentals physical rubber prices continue to remain low to flat In the beginning of the week, RSS4 grade rubber fell from Rs 68.50 to Rs 66.50 per kg the rate that was also quoted in the weekend. With global recession spreading across sectors and with automobile sector hit by a crisis, no near-medium term recovery in prices is expected.
The February futures for RSS 4 closed at Rs 68.43 (68.93), March at Rs 69.59 (69.88), April at Rs 71.04 (71.05) and May at Rs 72.10 (71.95) a kg on National Multi Commodity Exchange (NMCE).
India’s Rubber Board has also stated that no improvement in rubber prices is expected although some improvement can be foreseen by the end of 2009.

Rubber consumption declined by 1.53 per cent in 2008 and this trend would continue again in 2009 by 0.83 per cent. But the observation of the International Rubber Study Group that the growth would pick up again in 2010 by 5.54 per cent gives much expectation to the rubber sector. The assessment is that the world nations would come out of the crisis, by the end of 2009.The rubber price depends on demand-supply positions, crude oil price, the trends in futures, value of currencies, weather changes along with so many other factors.

Crude Oil
Crude oil prices were highly volatile in the last week. Prices rose and touched a weekly high of $46 per barrel, but could not hold on to their gains, as strong dollar and more than expected rise in crude oil inventory weighed on oil prices. Demand for oil in U.S. during the four weeks ended Jan. 16 averaged 19.4Mbbl a day, down 4.7 percent from a year earlier. Crude inventories at Cushing, Okla., the delivery point for crude futures traded on the New York Mercantile Exchange, rose to 33.2 million barrels. Inventory at Cushing has increased by 20% in past four weeks and it is approaching operable storage capacity of about 34Mbbl, putting downward pressure on near month oil prices.

Crude Oil inventory has once again increased sharply; confirming the facts that demand for energy products is weak amidst deteriorating economy. With China’s economic growth is expected to fall sharply, there are very less hopes for any rise in energy demand in the medium term. In the short term, market participants will keep close eye on how new US government plans out its stimulus package, as it can affect the trader’s sentiments. We believe that crude Oil prices can face resistance near $50 level and can fall towards $35 levels in coming days.

Base metals
There is a lack of enthusiasm and a lack of buyers as it is nearing to Chinese New Year (this week). It is possible, though, that we will see some short covering for taking profits. Keeping in mind the steady rise in inventories & also the continued uncertainty over the course of the global economy and the unresolved issues in the banking system, base metals can have limited upside. As the recession spreads, it undoubtedly will affect demand for the commodity, and we could witness further declines in the price.

Base metal pack may fall further, if the global recession further cuts growth in China target of 8% which is unimpressive considering that country's robust economic expansion in recent years, the largest user of the metals. Prospects for the metals complex are dull in the short-term, with the path of least resistance seen on the downside, although most metals have some breathing space above the bear-market lows. A backdrop of soft demand, weak physical markets and rising inventory levels continues to depress prices and dampen sentiment.

Black Pepper
Shortages continue to plague the market even as domestic demand for pepper is good.Pepper in the physical market ended on a positive note in the weekend recovering from previous day’s losses. The pepper futures market on Friday remained more or less steady with marginal decline for want of buying support.

February contract on Friday on NCDEX declined by Rs 46 to Rs 12,180 a quintal. March and April also dropped by Rs 41 and Rs 57 respectively to Rs 12,143 and Rs 12,185 a quintal. In the global markets, Indian parity remained marginally above other origins. MG 1 was quoted at $2,675 (fob) while Indonesia was offering L Asta at $2,600 a tonne (fob). V Asta was being offered at $2,600 a tonne (fob) while B Asta at $2,300 a tonne (fob).

The reason for positive sentiments was the good buying interest in the upcountry markets that pushed prices upwards. Arrivals of 16.5 tonnes were completely sold. The prices at the benchmark Kochi markets was offered at Rs. 12300 per quintal for garbled variety and Rs. 11800 per quintal for ungarbled, up by Rs.200/qtl as against prior session. Export orders are still sluggish even as domestic demand was good but supplies were inadequate.

Last week, the availability of valid stocks in Indian exchanges is estimated at below 1,000 tonnes as against higher outstanding levels. Stock position in Vietnam and Indonesia was also not worth talking about. Total availability in India is estimated at 10,000 tonnes. Under the prevailing situation black pepper is likely to trade range bound to firm at the physical counter during the days ahead.

Soybean
Soybean prices surged about 9 per cent (from Rs 2243/quintal to Rs.2445/quintal) during the last week on account of lower production estimates of Argentina’s soybean crop to 45 million tonnes from 46 million tonnes earlier estimates. According Indore based Industry Soybean Processors Association (SOPA), soybean production estimates is about 90 lakh tonnes as compared to previous estimates of 108 lakh tonnes this year.

Higher prices of domestic soy meal owing to better export demand also provided support to bulls in the market. India’s soy meal exports amounted to 6,65,304 metric tonnes in December, 2008 as against 5,51,382 metric tonnes during the same month last year. In the coming week, soybean prices are likely to trade lower on profit booking after the sharp rally during the last 4-5 weeks. NCDEX Soybean (Feb contract) has a support at 2260/2150 and resistance is seen at 2480/2550 levels.

Jeera
Spot prices at the benchmark Unjha markets were quoted at firm rates in beginning of the week but declined by the mid of the week tracking Futures. Profit booking at the Futures was witnessed after surging by Rs. 1500/qtl. At the domestic markets there are lower stocks of jeera with the stockists. Production of Jeera for the year 2009 is expected to be lower at around 22 lakh bags as compared to 25 lakh bags in 2008. Carryover stocks of Jeera is likely to be around 3 lakh bags (1 bag= 55 kgs.). Weather in the jeera growing areas may determine the price trend in the end of January to February 2009.Demand from the overseas market is expected in the coming weeks. This may also provide support to the prices in the short to medium term.

Sugar
Sugar market is witnessing bullish sentiments on persistent demand from stockists and retails even as availability from mills is restricted.Brisk buying by bulk consumers, like soft-drink manufactures and Pharma companies mainly support the upward movement. Total availability for the month of January is 1.7 MMt and 5MMt for March quarter. Government has set a higher sugar sale quota for the current month.

Sugar production is expected to decline to between 17.5-18 MMT in 2008-09. The industries believe that the country may have to import up to 2 MMt of raw sugar before the season ends in September. In U.P., sugar production has plunged by 15% on year to only 2.2 MMt till January 15, while Maharashtra produced only 2.7 MMt till Jan 13, 6.9% down from the same period a year ago. NCDEX sugar M stocks were sharply up at 11,895 metric tonnes in their warehouses as of Jan. 21. Out of the total volume, 9535 Mt are in Kolhapur and 2360 Mt in Pune. Sugar S stocks were at 229 Mt in Kolkata.

(with analytical inputs from Angel Commodities, Mumbai)

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