Gold, base metals may trade lower, agri commodities cautious on monsoon

Non-Agri Commodities  

On a fortnightly basis, global equity markets traded mixed owing to a major sell-off in US and European bonds which alarmed the investors and made them reassess their exposure in emerging markets. Moreover, the US President expressed his concerns at the Group of Seven summit over persistent Dollar strength that is hampering the currency of emerging markets.

Investors were prompted to book profits on the recent rally seen in the US Dollar Index after the robust job claims data release which raised expectations of a rate hike. The European Central Bank (ECB) spiked up its inflation forecast of 2015-16 to 0.3 per cent from 0 per cent which infused optimism in the market that the zone is on the recovery mode. Furthermore, Greece got some breathing room from its international creditors, who postponed its payment date late until the end of June and also came out with proposed plan of actions that amounts to a take-it-or-leave-it offer so as to save Greece from defaulting.

The Indian rupee depreciated 0.80 per cent in the last fortnight after the RBI in its second Bi-Monthly Monetary Policy review on June 2 2015 reduced the policy repo rate from 7.5 per cent to 7.25 per cent and hinted towards no more cuts in near-term owing to weak monsoon forecast and cautious stance on India's recovery. Overvaluation of Indian companies along with mid-season profit booking weakened the domestic equity markets. However, sharp losses were restricted after the MSCI told China to further liberalise its capital markets before including its Chinese domestic shares. According to the World Bank's report, India has figured in top five emerging economies for highest investment commitments which infused optimism on the growth of the economy and benefitted the rupee.

In the past fortnight, spot gold prices traded lower by around 0.79 per cent to close at $110.3/oz while MCX gold prices rose marginally by 0.13 per cent to close at Rs 26,894/10 grams. Unexpected stall in the US consumer spending and comments on interest rates from a Federal Reserve's official led to the fall in prices. Stronger-than-expected data on the US manufacturing activity and construction spending along with mounting worries of a Greek default contributed to the euro's weakness in turn exerting downside pressure on the yellow metal. Besides, the IMF allowed Greece to bundle its four debt payments due this month into a single payment which is now to be paid on the 30th of this month thereby acting as a negative factor for gold prices. International silver prices lost its value by around 4.65 per cent while MCX silver lost its value by 4.58 per cent in the past fortnight. Fall in silver prices is on account of weak gold prices.

However, fall in the dollar index by 2.06 per cent cushioned sharp downside in silver prices. LME Copper prices fell for third fortnight in a row and declined 1.7 per cent as strength in the DX owing to persistent Greek concerns after IMF pulled out of talks with debt-stricken Greece due to failing compromise over labor market and pension reforms hurt dollar denominated metals. Also, the season's strongest quarter for copper demand in China passed its peak with factories eyeing a summer production slowdown, leading to expectations of lower metal consumption. Moreover, LME stocks yesterday gained by the most since March or 3.1 per cent and have already ballooned 90 per cent in the past year. This is a grave concern as supplies are rising at a time when slower economic growth is curbing demand from China, the world's top consumer. MCX copper prices fell by 1.5 per cent in the last fifteen days in line with international trends. In the past fortnight, WTI and Brent crude oil prices lost its value by 0.56 and 2.58 per cent respectively in the international markets. MCX crude oil prices also declined marginally by around 0.28 per cent as The Organization of the Petroleum Exporting Countries (OPEC) pumped a 2-1/2 year high of 31.22 million barrels of oil per day (bpd) in May, a Reuters monthly survey showed. Despite the bearish mood, Saudi Arabia, OPEC's most influential member, raised the official selling price for its benchmark Arab Light crude to Asia in July, citing robust demand in the region and higher consumption at home during the hot summer months. Investors ignored a fifth straight weekly decline in the US crude stockpiles to focus instead on a big build in distillates, including diesel, as the peak season for the US road travel gets under way.

Outlook

Gold prices trading below the $1,200 psychological mark and probability of rise in the interest rates in the US, and spate of good economic data from the US are all possible factors for gold prices to head lower in the coming fortnight. Slump in Chinese demand and worries that OPEC's decision to pump crude without restraint could prolong the current supply glut. On the contrary, drawdown in crude inventories for five consecutive weeks in a row in the US is a positive signal on the demand side.

We expect base metal prices to trade lower as Greece concerns are likely to remain at the forefront, thereby providing strength to the DX and hurting global risk appetite. Also, fixed asset investment in China slowed and led to signs that the biggest consumer is likely to miss its target of 7 per cent growth in the second quarter.

The agri commodities have witnessed a downtrend during the last fortnight as many parts of the country witnessed encouraging signs of progress of monsoon due to pre-monsoon showers. According to the Indian Meteorological Department, the monsoon hit Kerala coast on June 5, four days behind the normal onset date of June 1; however, its progress over the interiors of peninsular India has been a little sluggish as cyclone Ashobaa likely to have halted the monsoon progress.

The kharif sowing is in progress and according to the latest data released by the Agriculture Ministry, the total sown area under kharif crops stands at 75.10 lakh hectares (lh), down 8.7 per cent, compared to 82.27 lh sown during the corresponding period last year.  Sowing of cotton reported down almost 17.5 per cent compared to last year's sowing area. Pulses acreage has touched 2.46 lh compared to 2.75 lh last year while oilseeds acreage reported up at 1.21 lh compared to 0.94 a year ago.

The bullish trend in chana has reversed during the last fortnight as government approved the plan to import pulses on large scale to check prices through state-owned trading such as MMTC etc. The most active chana July NCDEX contract was down more than 4.8 per cent during the last fortnight and closed at Rs 4,637 per quintal. Meanwhile, country has imported about 390 thousand tonnes of chana during Apr-Feb 2015, which is more than 41 per cent higher than the quantity imported in the entire previous year. Higher stocks of imported chana and government's strict hoarding policy may keep the chana prices sideways in coming fortnight however; forecast of weak monsoon indicates an uptrend in prices in long term.

During the last fortnight, oilseed complex closed in red, except, castor which closed 1 per cent higher due to rising demand from the consuming industries against decline in supply from growing belts. Soybean seed continue its negative trend taking clues from the international markets on record sowing and stock levels. In the country, supply glut on account of less crushing coupled with lower demand for meal export weigh on prices. The active NCDEX Aug'15 contract tank 8.2 per cent from its high during last fortnight and closed 5.3 per cent down at Rs 3770 per quintal. Mustard seed prices have corrected this fortnight and closed 1.5 per cent down on profit booking at higher levels. However, the prices have recovered about 2.7 per cent from its low of Rs 4,075 per quintal and closed at 4,187 levels. The news on lifting a ban on Indian rapeseed meal by China and lower production estimates may boost the price.

Refine Soy oil and crude palm oil (CPO) traded both ways last fortnight and closed a little lower. The soy oil prices have declined 2.7 per cent from its high and closed 0.9 per cent lower on record imports in 2014-15 at 1.34 lakh tons (Nov-May), up 65 per cent compared same time last year. CPO prices mainly take clues from the Malaysian palm oil closed down marginally on surge record stock data. But good imports and reports on supply concern due to El Nino capped further drop in prices. We expect soybean and refined soy oil to trade sideways to negative due to subdued demand for soybean for crushing on ample oil supplies from import and negligible meal exports. Monsoon progress may also weigh on prices too. Mustard prices may continue on the bullish trend due to reports on lower stocks amid less production and anticipation of meal export demand from China. However, CPO is expected to trade sideways to negative on reports on over supply  in Malaysia and lower export predictions.

Among softs, cotton has largely traded range-bound during the fortnight mainly due to steady demand from the ginners and millers on regular supplies from the CCI auctions. The international markets remained under downside pressure on concerns over China's plans to release cotton from its state reserves this year in a bid to reduce its bulging stockpile.

In the last fortnight, the sugar futures remain weak on higher supplies from mills against steady demand from bulk consumers. Sugar closed down about 3.5 per cent and closed at Rs 2,191 per quintals. This year's sugar production estimated to touch an all-time high of 28.3 million tonnes (MT) in the ongoing marketing year, 2014-15.

We expect cotton to trade sideways to negative due to supply glut expected in international while sugar will trade sideways on supply glut in domestic market. In the last fortnight, spices complex were most volatile and closed on negative note. Jeera prices closed 5.4 per cent down during the last fortnight and closed at Rs 16,580 due to sluggish demand from retailers and stockists amid quality issues. But the prices have recovered in last 3 trading sessions on limited arrivals. Turmeric prices have declined about 4.6 per cent on lack of upcountry demand due to arrivals of medium quality. Coriander prices have plunged 6 per cent last fortnight on heavy selling by the speculators at high prices and also recovered 2.4 per cent to close at Rs. 12218 per quintal on concern over the production coupled with high domestic demand.

In the coming fortnight, Jeera prices may trade on positive bias due to lower arrivals and expectation of better export demand but turmeric may decline due to satisfactory monsoon progress. The coriander may remain bullish due to restricted supply and good domestic demand.

(Naveen Mathur is Associate Director, Commodities and Currencies, Angel Broking, gives a fortnightly trend outlook for commodities)