Commodities markets remained positive in past fortnight: Angel Broking

Non-agricultural commodities
In the past fortnight, world market sentiments were largely positive after the easing of geopolitical tensions between Ukraine and Russia. Further, favorable economic data from the euro zone and the UK supported an upside in the markets. However, a sharp upside in the markets was capped due to mixed economic data from the US along with a decline in China's manufacturing data.
In the domestic markets, India's current account deficit for October-December 2013 supported an upside in the markets, which touched lifetime high levels. Further, strong inflow of foreign funds into equities acted as a positive factor. This led to an appreciation in the Indian rupee by 1.7 per cent along with weakness in the dollar index (DX). Inflow of funds through a sale of bonds also supported an upside in the currency.

Coming to the performance of non-agricultural commodities in the past fortnight, spot gold prices rose by 1.3 per cent on account of upbeat market sentiment coupled with a weakness in the DX. Further, a recovery in the exchange-traded fund's holding managed by SPDR Gold Holdings Trust by around 0.9 per cent supported an upside in prices. On domestic bourses, prices gained around 0.8 per cent and closed at Rs 30,130 per 10 gram on March 7. The rupee's appreciation capped sharp gains in prices on the MCX.

Spot silver prices declined by more than 4 per cent in the last fortnight as a result of mixed performance in base metals complex. However, weakness in the DX, rise in iShares Silver Trust Holdings by 0.2 per cent along with a positive price trend in gold could not provide respite to a fall in prices. On the domestic front, prices slipped by 2.7 per cent and closed at Rs 46,205/kg as on March 7.
During the last fortnight, LME copper prices declined by more than 5 per cent due to a fall in manufacturing activity in China. Also, mixed economic data from the US coupled with a rise in Shanghai inventories exerted a downside pressure on prices. However, a rise in risk appetite in markets along with a weakness in the DX failed to provide a respite to a fall in prices. Also, a decline in LME inventories by 5.7 per cent cushioned a sharp downside in the metal. Favorable manufacturing data from the euro zone restricted a downside movement in prices. MCX copper prices dropped by more than six per cent in the last 15 days due to the rupee's appreciation and closed at Rs 421.40/kg as on March 7.

Nymex crude oil prices gained marginally around 0.4 per cent in the last fortnight on the back of a sharp declining trend in inventories at Cushing, Oklahoma. Further, upbeat market sentiments coupled with a weakness in the DX acted as a positive factor. However, a sharp upside in prices was prevented due to easing tensions between Ukraine and Russia, which is the world's largest energy supplier. Additionally, a rise in API and US crude oil inventories and mixed economic data from the US capped sharp gains in prices. On domestic bourses, prices declined around 0.8 per cent in the last 15 days as a result of the rupee's appreciation and closed at Rs 6,305/bbl.

Outlook
In the coming fortnight, we expect precious metals, base metals and crude oil prices to trade on a mixed note on the back of uncertainty over the Quantitative Easing tapering by the US Federal Reserve in its meeting on March 18 and 19. Further, upbeat market sentiments coupled with a weakness in the DX will support an upside in prices. Additionally, expectations of optimistic economic data from major global economies will act as a positive factor. On the other hand, expectations of mixed economic data from the US will exert a downside pressure on prices. Slow gross domestic product growth in the US and a decline in manufacturing data from China will act as negative factors. In the Indian markets, the rupee appreciation will cap sharp gains or exert a downside pressure on prices.

Agricultural commodities
Most agricultural commodities traded on a bullish note over the last fortnight as unseasonal rains and extreme cold conditions in states like Rajasthan and Madhya Pradesh damaged the standing rabi crop. Rains have also slowed down the pace of harvesting and may also affect the yield. A possibility of emergence of the El Nino phenomenon also supported to prices.

Sowing has progressed well during the Rabi season 2013/14 and acreage at 663.06 lakh hectares as on February 21 is almost 5.64 per cent higher from 627.66 lakh hectares last year. Except for coarse cereals, all other crops have seen a rise in acreage. Area under rice increased by 25.79 per cent, pulses 6.06 per cent, wheat 5.75 per cent and oilseeds by 3.42 per cent.

Oilseeds and edible oil segment traded on a positive note tracking firm overseas market sentiments. Soybean was the biggest gainer in the edible oil complex posting 6.4 per cent returns. Prices took cues from higher overseas markets on the back of weather concerns in South America coupled with strong export demand for US soybean. The Solvent Extractors' Association of India reported a decline in soy meal exports for February. Mustard seed gained 5.6 per cent on crop damage fears due to unseasonal rains coupled with a spillover effect of higher oilseed prices. However, higher arrivals capped sharp gains. Soy oil and crude palm oil gained 4.5 per cent and 4.2 per cent, respectively, tracking firmer overseas markets and higher edible oil prices. Increasing demand for edible oils also supported an upside. Palm oil in the overseas markets gained due to lower output leading to a tight supply situation.  

Among spices, coriander was the biggest gainer posting 4.2 per cent returns due to crop damage fears on the back of unseasonal rains in Rajasthan. Turmeric traded on a mixed note. Prices recovered from lower levels on crop damage fears in Andhra Pradesh leading to lower output coupled with good demand for the quality crop. However, huge carryover stocks capped sharp gains and prices settled 1.1 per cent higher. Jeera was the only loser in the spices complex due to arrival pressure of the new season crop coupled with record output expectations and settled 7.7 per cent lower.

Among soft commodities, sugar declined in the first half of the fortnight on weak demand. However, prices bounced back sharply in the latter half and settled 2.8 per cent higher as the government notified the subsidy on exports of raw sugar. Also, the Indian Sugar Mills Association lowered its 2013/14 output estimates by 5 per cent. Cotton futures declined in the first half of the fortnight due to increasing arrivals as well as harvest pressure of Kalyan Kapas variety. However, prices recovered from lower levels on short-covering coupled with a recovery in overseas markets and settled 1.2 per cent lower.

Chana futures was the biggest gainer in the agricultural commodities basket, posting 10.9 per cent returns on fears of crop damage due to unseasonal rains in the major producing states of Madhya Pradesh, Rajasthan and Maharashtra. Also, expectations that output may be lower than the second advance estimates lent further support to prices. Also, there were reports that the state governments may procure chana at the minimum support price to curb the falling prices.

Outlook
We expect prices of most rabi crops like chana, mustard seed and wheat to continue to gain on fears of lower-than-expected output due to unseasonal rains leading to crop damage and yield losses. However, a sharp upside may be capped and downside pressure may be witnessed at higher levels as the arrivals of the new season crop gain momentum. Jeera may continue to decline due to arrival pressure and record output. However, a sharp fall in prices may lead to a decline in the arrivals. Turmeric may trade on a mixed note. Demand for quality crop may support prices while huge carryover stocks may keep prices under check.  Soybean may continue its upside movement tracking higher overseas markets and tight domestic supplies. However, lower meal export demand may cap sharp gains. Expectations of a shift of Chinese import demand from the US to South America can also pressurize prices at higher levels.
It is crucial to keep a close watch on weather conditions across India as the same shall have a significant impact on the crop yield of the standing rabi crops. Prices may also take cues from movement in the Indian rupee.

Naveen Mathur is Associate Director-Commodities and Currencies at Angel Broking.