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32
Fortnightly Outlook For Commodities
In the previous fortnight, commodities saw the much
awaited correction, especially in precious metals
and energies. While base metals remained firm,
agricultural commodities continued to trade at their
2010 highs. But the US dollar has been declining rapidly
against the basket of currencies, inspite of profit-taking
in commodities.
Also, while developed economies are recovering from
the after-effects of the financial meltdown by way of
quantitative easing, which many believe to be the cause
of inflation, emerging markets, which have been the
growth engines of global recovery, are finding it difficult
to win the battle against inflation. In fact, scores of
people took to the streets in Egypt seeking an end to the
30-year rule of President Hosni Mubarak.
But many believe that additional quantitative easing or
the QE2 is one of the major reasons for inflationary woes
and the Federal Reserve does not appear to be in any
mood to stop this anytime soon. However, despite rate
hikes in emerging markets, inflationary expectations
could be high for the coming months as this hot money is
likely to find its way into commodities.
PRECIOUS METALS
Precious metal prices took a beating in the last fortnight,
as interest rate hikes in the emerging markets and a
strong set of economic reports from the United States
resulted in profit-taking in this complex. Besides, investors
were seen booking profits from their long positions.
Exchange Traded Funds (ETFs) of these precious metals
saw good redemptions and the world’s largest gold and
silver ETF’s holdings declined by more than 5% during
the month. Gold prices declined to `19,600/10 gm from
`20,800/10 gm and silver prices dropped from
`46,000/kg to `41,250/kg.
But gold and silver futures jumped 2% and 3% respectively,
on safe haven demand amid escalating tensions in
Egypt towards the end of the fortnight. We believe gold
futures will find stiff resistance at `20,200/10 gm and
silver at `43,800/kg, in the next fortnight.
ENERGIES
Despite OPEC officials’ remarks on the increase in
production of crude oil, its prices plummeted to
$85.50/barrel from $92/barrel, in the previous fortnight.
In addition to this, the weakness in the dollar further hit
Beyond Market 04th Feb ’11
the price of crude oil. However, towards the end of the
fortnight, oil futures increased 4.3% to $89.34.
Moreover, high food prices and rising inflation in North
Africa and the ongoing protests in Egypt, could hit
supplies of crude oil as the Suez Canal, which connects
the Mediterranean and Red Sea, is located in Egypt.
Thus, these geopolitical concerns are dominating the
crude oil markets more than fundamentals, pushing the
rally in this complex to $94/barrel to $95/barrel. But the
oil prices may drift lower, once these risks subside.
BASE METALS
While zinc and lead performed poorly owing to rising
production in China and increased surplus globally,
nickel met expectations and tested the highs of `1,230/kg
due to the drop in pig iron production in China, in the
previous fortnight. Floods in Australia too hit the supply
of base metals.
Further, the introduction of new Exchange Traded Funds
(ETFs) for metals and the additional quantitative easing
helped base metals remain firm in the previous fortnight.
We believe China’s attempts to control inflation will hurt
the demand for non-ferrous metals and we expect prices
to remain weak, in the coming fortnight.
However, China’s copper refining capacity got a boost,
as Yunnan Copper Industry, China’s third-largest
producer, added 1,00,000 tonnes of capacity. It plans to
expand the same by 5,00,000 tonnes per year, over the
next five years. The refined copper production reached a
record of 4.8 million tonnes in 2010 in China, the world’s
largest producer of copper.
AGRO COMMODITIES
We believe that the rise in the prices of food items may
cause protests and social unrest to grow globally, as was
visible in parts of the world in the previous fortnight. The
bull run in agricultural commodities has been partly due
to weather uncertainties. In the Indian context, agricultural
commodities like cumin seed and coriander may
remain buoyant in the coming fortnight.
The excellent rally in guar seed in the past fortnight may
continue and we remain bullish on this commodity. We
also recommend market participants to go long between
`2,650/quintal and `2,750/quintal in cumin seed.
Further, profit-taking in oilseeds looks likely due to the
improvement in weather conditions in ArgentinA.
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