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

Dalal Street Investment Journal - - CONTENTS -

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.

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