International commodities markets are on a boil since beginning of the current financial year and most commodities are up be that metals, crude oil or agri commodities. While so far US has refrained from raising rate after last December hike which has attracted global financial investors to commodities again, the decision will continue to be a biggest headwind for commodity rally to continue. Bloomberg all commodity index is up 9.4 per cent from April while LME metal index (up 6.3 per cent) and Bloomberg agri index (4.6 per cent) has followed.
In international markets, crude oil recovered sharply from low levels on talks of production freeze that is still hanging over, metals lead by Zinc went up on reports of production cuts and agri commodities remained firm on impact of el-Nino which restricted supplies and may continue to be so.
Gnanasekar Thiagarajan, director, Commtrendz Research said, “as second rate hike by the US Fed was getting delayed on weaker economic data followed by Brexit financial investors continued to flow money to commodities which were also supported by production cuts by major mines globally. India and China have also played major role.” While India and China were storing crude oil at lower prices, el-nino impact and draught in India had resulted in lower exports from India while China continued production cut and use of metals for environment concerns.
Zinc has outperformed metals globally as the Philippine has suspended operations at two more mines due to environmental violations taking total of closed mines to 10, eight of them are of nickel. Crude oil has been moving in the range of $40-50 as at lower price production freeze concerns emerges while on rising prices supplies also increase due to some fields turning viable and market start discounting that.
OPEC is meeting to review crude oil production strategy in September end and crude is expected remain firm till than but Kunal Shal, Head of commodities research at Nirmal Bang Commodities adds another dimension to that indicating coming months will be challenging for commodity rally to continue. He said, “while Production cuts in case of ferrous, non ferrous metals will help the segment to remain firm, US crude oil production have dropped sharply, bottoming out of down turned coupled with negative real rates in many developed economies bringing investors back in commodities complex but we see challenging second half as July month have been bad one for China and first time Chinese data is giving signal that, during second half some deceleration in economic activity is underway. Industrial production, private fixed asset investment and investment growth in state owned enterprises have all fallen.”
Recent Federal reserve minutes released last week has also indicated rate hike can be earlier than expected which means it could be soon after US election and may come in December meeting if not in October meeting. Gnanasekar says, “this rate hike headwind will remain over the continuation of rally in commodities.” He said whenever that happens, if not now after December, will drive financial investors to bonds and away from commodities and, “market will keep adjusting prices to this possibility.”
Agreeing to the view, Kunal Shah also belives, “prices of metals may consolidate and drifts lower marginally but we remain bullish on crude oil as Overall cut in capacity expansion coupled with drop in us crude oil production makes crude oil attractive from the long term perspective”.
Agri prices will remain tight as of now except wheat which has seen a higher production. Sugar, coffee, cotton and even edible oil in which India demand may have stabilised but global tightness prevails, will remain firm.