Ukraine, US Fed impact global commodity prices

Market sentiments across the world have been largely positive in the last fortnight following the slight easing of geopolitical tensions between Ukraine and Russia. The US Federal Reserve tapering its bond buying programme and signaling a rise in the federal funds rate also suggests that the US economy is improving. As for economic data, sentiments have been mixed as the US reported favorable data sets whereas the Euro Zone reported mixed data.

In the domestic market, favorable inflation data along with robust foreign fund inflows into equity markets led to 0.3 per cent appreciation in the currency. Further, selling of dollars by banks and exporters along with dollar supply by the Vodafone Group after raising its stakes in its domestic unit had a positive impact. However, another round of QE tapering by the Federal Reserve along with the rising strength of the DX (Dollar Index) capped sharp gains.

Coming to performance of non-agri commodities in the past fortnight, we saw that Spot Gold prices rose at the start of the first week reaching a high of $1391.76 on the back of escalating geo-political tensions between Russia, Ukraine and the West over the Crimean peninsula.

Gold prices in the last fortnight, however, fell by 0.4 per cent on account of decline in haven demand and mixed holdings trend in the earlier part. But, sharp losses were cushioned on the back of upbeat market sentiments and increasing investors appeal for safe heaven demand along with rise in SPDR gold holdings.

ETF's holding managed by SPDR Gold Holdings Trust gained by around 1.13 per cent supported an upside in the prices. On the domestic bourses, prices fell by more than 1 percent owing to Rupee appreciation and closed at Rs.2972/10 gms on 21st March 2014.

Spot Silver prices declined by more than 3% in the last fortnight due to the weak performance of base metals. Strength in the dollar index in the last week and reduced appeal for silver as a safe haven was largely the main factor exerting downside pressure on prices. In addition, profit booking in gold and reduced geo-political tensions pushed the metal lower. Holdings in iShares Silver Trust Holdings declined by 39.62 tonnes to 10164.74 tons for the last fortnight. On the domestic front, prices slipped by 3.4 percent and closed at Rs.44651/kg as on 21st Mar'14.

During the last fortnight, LME Copper prices slumped by around 5 percent due to fall in industrial production and trade balance activity in the world's biggest consumer, China. Also, mixed economic data from the US coupled with unfavorable data from the Euro Zone exerted downside pressure on the prices. Also, rise in risk aversion in the markets along with strength in the DX acted as a negative factor. Also, decline in LME inventories by 1.2 percent coupled with easing of geopolitical tensions between Russia and Ukraine could not cushion sharp downside in the red metal. MCX copper prices dropped by 5 percent in last fifteen days due to Rupee appreciation and closed at Rs.400.30/kg as on 7th Mar'14.

Nymex Crude oil prices declined by more than 3 percent in the last fortnight, on the back of concerns of economic slowdown in China and easing of geo-political tensions between Ukraine Russia and the West. Besides, further tapering by the Fed and indication of increase in the interest rates by next year also exerted downside pressure on prices. Besides, increase in crude inventories in the US for the consecutive two weeks as refiners go for maintenance pulled down crude prices. However, sharp downside in the prices was prevented as comments from OPEC said that world oil demand for 2014 will increase. On the domestic bourses, prices declined around 3 percent in last fifteen days as a result of Rupee appreciation and closed at Rs.6121/bbl. 

Outlook

In the coming fortnight, we expect precious metals, base metals and crude oil prices to trade lower on the back of weak global market sentiments along with strength in the DX.

In case of crude oil prices, easing of supply disruption concerns after it was stated that the geopolitical tensions between Ukraine and Russia will have limited impact on crude oil supply, will exert downside pressure on prices.

For base metals, positive economic data from the US and China will cushion sharp downside or even reversal in prices.

Agri commodities basket remained largely under downside pressure over the last fortnight as clear weather and arrival pressure of the rabi crops have eased the rising prices. Unseasonal rains and extreme cold conditions towards February end early March led to damage of the standing rabi crop.

Sowing for the Rabi season 2013-14 was reported at 663.06 lakh hectares (lk ha), almost 5.64 percent higher than 627.66 lk ha last year. Except for Coarse cereals, all other crops haves seen a rise in the sowing acreage. Area under Rice increased by 25.79%, followed by Pulses 6.06%, Wheat 5.75% and Oilseeds by 3.42%.

Among agri commodities, oilseeds and edible oil segment traded on a negative note. Soybean prices which gained sharply since January end due to tight supplies in the domestic markets and crop concerns in South America, corrected from higher levels on weak soy meal export demand from India and settled 1.2% lower. Mustard seed also remained weak as arrivals of the new season crop mounted downside pressure on prices, losing 5%. CPO and Soy oil lost 3.1% and 3.8% respectively tracking weakness in the overseas markets. Soy oil prices on the CBOT have declined on lower end user demand while Palm oil prices on the BMD declined tracking weak exports. However, lower palm oil output supported prices at lower levels.

Among spices, Jeera declined 6.9% on record output coupled with arrivals of the new season crop. Coriander prices declined 7.6% on arrival pressure of the new season crop. Prices gained earlier due to crop damage fears. Turmeric was the biggest loser positing 12.8% losses as arrivals of inferior quality crop led to a decline in the demand. Huge carryover stocks also added to the downside pressure.

Among softs, Sugar was the biggest gainer posting 2.6% gains due to lower output estimates coupled with export demand. Cotton futures remained under downside pressure and lost 0.7% tracking weak Kapas prices due to increasing arrivals. Kapas on NCDEX declined sharply by 4%. However, positive overseas markets limited the downside and supported prices at lower levels.

Chana futures touched a contract high of Rs. 3416 in the first half of the fortnight on the back of crop damage due to unseasonal rains and hailstorms. However, prices declined from higher levels and losing 1.8% as clear weather led to liquidation of long positions. Also, expectations of increase in arrivals led to fresh selling at higher levels. Reports that NAFED will start procuring chana in MP Karnataka and Gujarat supported prices at lower levels.

Outlook

We expect prices of most of the Rabi crops like Chana, Mustard Seed and Coriander to remain under downside pressure on increasing arrival pressure of the new season crops. Turmeric may also decline due to weak demand on the back of arrivals of inferior quality crop as well as huge carryover stocks. Jeera is expected to continue to remain bearish on record high output as well as increasing arrivals. However, overseas demand may support prices. Soybean may trade on a mixed note. tight supplies  may support prices, while weak soy meal export demand may pressurize prices at higher levels. Expectations of shift of Chinese import demand from US to South America may also pressurize prices at higher levels.

Prices may take cues from any data on the extent of crop damage due to the recent unseasonal rains and erratic weather conditions. Prices may also take cues from movement in the Indian Rupee.

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