Supply crunch to push prices

The post-recession rise in commodity prices, which began in 2009, maintained the momentum in 2010 and transformed into a significant bull run. Many of these prices touched all-time highs, with the weakening dollar contributing significantly to the rally. In precious metals, the rally was supported by the demand for safe havens and high liquidity.

The global economic recovery turned out to be moderate as low growth in developed countries offset high growth in emerging economies. The ever-rising demand in the emerging economies and fall in production due to adverse weather conditions helped many commodities surpass their previous highs.

"Gold and silver will continue to gain as factors like low interest rates and global growth concerns stay"

The drought in Russia and the recent dry spell in Argentina and Brazil bolstered the prices of agricultural commodities. Though there is no certainty on the pace of global economic growth, emerging economies will keep the demand for food and other commodities buoyant. This will provide adequate opportunities to investors in 2011.

The ongoing currency war between China and the developed world will fuel commodity prices. With currencies turning weaker, commodities will become costlier as pumping more money into the system will not ease supply pressure.

With China printing money to lower the overvalued yuan, the US Federal Reserve infusing $600 billion into the local economy in the next five months and Japan devaluating the yen to emerge from a long era of deflation, there will be an oversupply of paper currency. This deluge of currency will eventually flow into the markets in the form of investment. These will chase higher returns, eventually increasing the disposable incomes.

GOLD TO CONTINUE TO GLITTER

Precious metals have had a phenomenal run in 2010, with gold prices rising by 20 per cent and silver going up by around 60 per cent. The supportive environment for precious metals is likely to prevail in 2011 because factors such as low interest rates and concerns about the global economic growth will not be addressed in a hurry.

30% is the growth expected in copper prices during the year 25% rise in aluminium prices will make it the second best pick among base metals

The US is likely to delay the tightening of its monetary policies to at least the second quarter of 2011 as it struggles with high unemployment and the risk of sliding into deflation. The European economies are still grappling with the debt crises. Uncertainty over the valuation of currencies has made gold a safer option. Until investors' fears regarding the shape of the global recovery are allayed and interest rates pick up, bullion will continue to remain the preferred hedge against uncertainty.

With the massive increase last year, we will see profit-taking in bullion at regular intervals. This will keep precious metals volatile and under pressure in 2011. However, some shine is still left in gold and silver-gold could reach $1,500 an ounce (6 per cent up from the current level) and then head to $1,600 (12 per cent), while silver moves towards $35-38 an ounce.

INDUSTRIAL METALS

At present, we are witnessing a strong and stable demand for industrial metals, such as lead, copper and zinc. The appreciation in the euro has made industrial metals cheaper in dollar terms. With improvement in the economic conditions and abundant liquidity, industrial metal ETFs (exchangetraded funds) are likely to emerge as the next investment avenue.

Several commodity players are in the process of launching exchange-traded products for base metals as they seek to tap the global market worth nearly $120 billion, which was dominated by gold till now. The new products will include copper, aluminium, zinc, nickel, lead and tin, as well as a basket of these base metals.

The new platform will provide investors an exposure to the physical industrial metals without the need to purchase and store them in physical form.

COPPER TO LEAD THE RALLY

In the first quarter of 2011, the prices of commodities are expected to increase, after which there can be some cooling off. Copper is expected to post a rally of 30 per cent during the year, with price targets of $11,000-11,500 per tonne. With an expected jump of 25 per cent from the current levels, aluminium will be the next best pick.

Nickel has a limited upside of around $28,000 per tonne. Rising raw material prices of iron ore and coking coal will support steel prices. Ongoing concerns regarding transport of iron ore from Karnataka and prevailing uncertainty are leading to a shortage of iron ore, compelling sponge iron prices to shoot up from around Rs 15,000 a tonne in April to around Rs 18,000 now.

As the supply situation remains tight and with no new projects coming up till 2012, domestic iron ore prices are expected to surge. With a one-year perspective, the demand is expected to rise in line with the gross domestic product growth and take prices to Rs 31,000 a tonne, surpassing the 2008 high.

FARM PICTURE ROSY

The global oilseed production for 2010-11 is projected at a record 440 million tonne (mt), an increase of around 2.2 mt over the previous year. However, soybean production is projected to slip 3 per cent to 250 mt, owing mainly to adverse weather in Latin America.

The price of soybean may slide to Rs 1,950-2,000 per quintal in the March quarter. However, it is expected to rebound to Rs 2,600-2,650 by mid-2011. As major economies recover and standards of living in developing economies rise, we can expect a bullish growth for edible oils in 2010.

A good monsoon this year will mean that oilseed production for 2010-11 is estimated at around 10 mt, a 4.15 per cent jump, reflecting a rosy supply-side picture.

The writer is Executive Director (Commodities), Anand Rathi

WHAT 2011 HAS IN STORE FOR YOU

1. How 2011 will impact you 2. Buoyant market, bullish returns 3. A roller-coaster year ahead 4. Top stock picks for 2011 5. Tracking a positive theme 6. Retail investors should go global 7. Keep pace with changing times 8. Debt funds on solid ground 9. Make the best of uncertainty 10. All set for new, improved cover 11. 'New norms don't include incentives' 12. Invest in a house, cautiously 13. 'Teaser rates don't benefit anyone' 14. Supply crunch to push commodity prices