Commodities Market Outlook
Commodity prices are in an uptrend and this phenomenon is seen across the commodity basket. Karan Bhojwani and Nikita Singh shares the outlook on commodity market and analyses the demand-supply equation in the commodity markets
Commodities in the world economy saw a stark rise in prices in 2017. After being earthward bound for over four years, the commodity prices recouped in 2017 in the Indian markets as well in line with the global trend. In an economy shaken by some historic initiatives and tax reforms, the rise in commodity prices were not only suggestive of revival and growth in the economy but it came as a consolation for businesses engaged in commodities. Going forward, the likely event of rupee depreciation will also prove to be a boon for commodity exporters who may pass on the derived benefit to the growers.
In the energy segment, while the easing of production restrictions in China cooled down the coal prices in the first half of the year, prices of thermal coal and coking coal, which are largely used in electric and steel industries, have remained high on the back of low inventories and natural disruptions. The coal prices are likely to hit an average of USD 70/tonne by the end of 2017 (up 6 per cent from 2016) as a result of China’s continued efforts to reduce coal supply. The prices of this industrial commodity are likely to be influenced by China’s coal policy. In a similar tone, natural gas has recorded an increase of 6 per cent in its prices as a consequence of strong demand and tight supply. Natural gas prices are expected to rise 15 per cent by the end of 2017 with the US being the key driver of its demand. The global oil industry recorded an 8 per cent surge in its prices in the first half of 2017, despite the tussle between the US shale oil recovery and OPEC’S production cut proposition. The crude oil prices are expected to touch an average of USD 55/ bbl by the end of the year, recording an increase of 26 per cent against 2016. The prices are further expected to go up to
USD 60/bbl in 2018 on strong compliance of OPEC production cut proposition, persistent rise in demand and rising production cost.
The prices of agricultural commodities showed mixed price movements in 2017, as prices of beverages plunged following the drop in cocoa prices, raw material prices surged on the back of rally in natural rubber prices, while grain prices remained high during the year. While the price of beverages are forecasted to slump further, the food commodity prices are expected to rise through 2020 with a constant upsurge in food and raw material prices. Popular agriculture commodities, including cotton, tea, coffee, natural rubber and grains are likely to record a robust growth in their prices in the near term. While the production of these commodities has also steadily increased, the unprecedented production losses and strengthening global demand is likely to move in favour of a notable price rise.
The fertilizer prices have substantially increased in the first quarter of 2017, with urea prices going up by 16 per cent, DAP by 9 per cent and nitrogen prices by 15 per cent during the year. Phosphate prices rose for the first time in eight quarters after China’s phosphate manufacturers implemented a strategic production cut from December 2016 onward. Despite the oversupply of a large number of fertilizers, the fertilizer prices are expected to go up at a moderate pace in the medium term due to higher demand and increasing energy cost, which will further attract investment in primary and processed fertilizer supply.
The geopolitical tensions have led the precious metals to attract considerable interest from the investors. Despite volatile price movements, the prices of platinum, gold and silver went up, posting a sizeable price rise in 2017. Further, the geopolitical tussle in the North Korean peninsula may continue to be a more dominating factor in determining the movement in prices of precious metals despite a rise in the US Federal Reserve interest rates. The rise in US Fed Reserve rate poses a downside risk for the prices of the precious metals. Strong physical demand for gold in China and India, delays in US Fed rates and a shortage in mine supply will work as additional factors to send the precious metal prices spiralling to a new high. The outlook for metals is positive for the coming year as well. While overall commodity performance remained subdued owing to softness in the crude oil prices, non-ferrous metals have remained a strong bet because of increase in metal prices globally and derived improvement in sales realisations for the vendors.