Commodities in a boom phase
Commodities globally, especially resource commodities, are in a bull phase, and experts say there are signs on the horizon that the supercycle is likely to continue.
This means that Indian industry will have to deal with high raw material prices, and user industries will see their costs rising though with a lag in some cases.
Kunal Shah, head of research at Nirmal Bang Commodities, said, “The supercycle in commodities is already underway, as there has not been any major investment in the commodities space for the last three years, while global growth getting stronger has led to a boom in resources.”
China’s economy expanded at an annual rate of 6.9 per cent in the June 2017 quarter, beating the government’s target. The US economy, too, grew faster than initially expected in the June quarter, notching its quickest pace in more than two years, and there are signs that the momentum was sustained at the start of the September quarter. US gross domestic product (GDP) increased at a 3 per cent annual rate in the April-June period. In the 2004-07 period, commodities were in a supercycle, and during 2010-2011 also commodity prices were in a cyclical upmove.
Most commodities, including base metals, iron ore, steel, coal, naphtha, have risen on an average of 30-50 per cent in the last one year, indicating a strong rally. For Indian companies, there has been some respite because of the stronger rupee, which is 4.4 per cent stronger versus the dollar, compared to what it was a year ago.
Oliver Reynolds, economist with Focus-Economics, a global research house, said, “The US dollar has dipped by around 7 per cent since the start of the year, against a broad basket of currencies, with the uncertainty regarding domestic and foreign policy that is emanating from the White House reducing investors’ appetite for the currency. As commodities are priced in dollars, this drop has likely boosted prices for raw materials by reducing the purchasing power of the greenback.”
The seeds of the rally were sown last year end when Donald Trump promised a $1 trillion push for infrastructure. The jury is out on whether that promise will be fulfilled, as the country is facing a debt ceiling issue, which needs to be revised, or some expenditure will need to be cut or tax increased. On the other hand, growth is being revised upwards for the global economy. As Reynolds puts it, “Stronger-than-expected global activity so far this year is also at play, and has led the 2017 Focus-Economics Global GDP consensus forecast to be revised upwards by 0.2 percentage points to 3.1 per cent since the start of the year.” This reflects improving global economic conditions, which are fuelling demand for commodities, leading to prices rising but not as much as in the past year. “We expect commodity prices to tick up mildly on average over the next 12 months, thanks to a solid global growth, although the price increase will be far less spectacular than that observed in the first half of 2017,” said Reynolds.
However, experts also say the percentage rise, going forward, will be somewhat muted, thanks to the higher base at present. For the supercycle to continue with similar momentum, Jean-François Lambert, founder of London-based Lambert Commodities, said, “A new catalyst is needed and India has the potential to be that. However, India needs to reach to that economic significance.”