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BW Businessworld

Base Metals’ Demand To Rise

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The memories of the year gone by remain fresh in our minds as 2011 was not only an eventful year from the economic perspective, but it also marked a new beginning for many Middle East nations that battled their way to freedom. From the financial perspective, a threat of a slowdown loomed largely due to rough economic weather in Europe.

Even China witnessed downside risks related to manufacturing and allied activities. The earthquake and tsunami in Japan in early 2011 also played a critical role in the supply chain disruptions across the globe. Despite losing its AAA rating (by Standard & Poor's), the US economy showed welcome signs of improvement, which offered a breather to an otherwise ailing world economy. In the west, doubts were expressed over the capability of European policymakers in  testing times. And in India, a flurry of scandals affected investors' sentiments that sent the equity indices in the negative zone. What cannot be missed about the last year is the drastic move in commodity prices. Global food prices hit a peak in February 2011 with the United Nations Food and Agriculture Organisation's (FAO) food price index touching a high of 238. But, food prices have stabilised after testing these highs and the FAO's food price index slipped to 215 in November 2011.

The current stability in food prices may help ease inflationary concerns, but with crude oil hovering above the $100 per barrel mark, it continues to threaten further rise in prices of other raw materials.

The New Year is fraught with a range of policy speculations. Improvement in the US economy in the last two quarters is acting as a positive catalyst. China and other emerging markets may change their stance towards growth while fighting inflation. This, along with anticipated measures by the European leaders, is expected to bring a change in the 17-nations that use the Euro.











GOING HIGH: Crude oil is expected to remain above $90 per barrel (Shutterstock)

At this juncture, therefore, the crucial question for an investor is to find out — what holds true for commodities this year? Commodities, which are a great indicator of what is happening across the globe have become an interesting asset class, which not only helps one diversify the portfolio but also to benefit from the demand-supply trends, thereby, reaping rewards.

Keeping this in view, we shall take a look at various commodities and their prospects in 2012. In the last year, performance of commodities in metals and energy space has largely been tuned to macroeconomic developments across the globe. Gold and silver touched new highs and remained upbeat. The yellow metal touched an all-time high of $1920 per ounce with silver testing around $50 per ounce. Crude oil, witnessed 11 per cent gains on the Nymex in the first-half of 2011 due to geo-political tensions in the Arab nations. Natural gas prices remained buoyant but increasing supply continued to act as a deterrent for a sharp rally. In our view, we expect crude to remain above the crucial $90 per barrel mark in 2012 on the back of consumption growth in emerging and developing economies along with potential supply disruptions. In domestic markets, we expect crude prices to rise in the second-half of 2012, with targets of Rs 6,100-6,350 per barrel.

For base metals, we have a positive outlook for the second-half of 2012 on account of improvement in the US economy and expected decline in interest rates in China. Apart from the inherent demand-supply fundamentals of each base metal, these two factors (US economy and Chinese interest rates) will constantly support their prices. Further cues from the Euro zone will provide a direction to base metal prices in the first-half of 2012. 

In the case of copper, concerns over the supply front are expected to continue which would  buoy its prices in the second-quarter of this year. China is expected to loosen its monetary policy and the return of credit in the market will also help support demand from the end of fabricators. Prices in India are expected to rise to around Rs 465-500 per kg by the second-half of the year. 

Rising inventories coupled with a comfortable supply scenario is expected to act as a negative factor for aluminium in the first-half of the year. However, in the second-half, prices are expected to rise and touch Rs 125-132 per kg. Nickel, which slipped 26 per cent last year, is expected to trade on a negative note with expectations of surplus stemming from an increase in output from new projects. Prices are expected to stabilise in the second-half and may touch Rs 1,270-1,320 per kg. 

In agro-commodities, while global food prices declined in 2011 and were dragged down to multi-month lows, on the domestic front, prices were comparatively stable on the back of above-normal monsoons for the second consecutive year. It led to an increase in output of most commodities including grains, oilseeds, sugar and cotton.

However,  2011 was also witness to new highs for certain commodities including guar seed, pepper, chana and mentha oil. Unlike non-agri commodities, domestic agri commodity prices were driven by the demand-supply fundamentals of the individual commodities. Guar seed and guar gum registered highest returns and gained around 155 per cent and 273 per cent respectively during 2011 on account of record-high exports which remained robust for the second consecutive year. Although, a tight supply position caused by a 25 per cent drop in output in 2011-12 season points toward a bullish trend in guar, we don't expect much upside in the coming year as overseas importers may shift to other cheaper substitutes of guar gum and exports may be hampered. Prices are expected to average around Rs 6,500 during the year.  Edible oil which posted positive returns in 2011 may continue to shine in 2012 on account of higher domestic oil meal exports coupled with supply tightness of oil crops in global markets. We expect soybean prices to touch Rs 3,000 levels in the second half of 2012. Cotton and sugar both have witnessed a considerable decline in prices but this year, we expect prices of sugar to recover from the current levels and touch Rs 3,300 levels. In the case of cotton, expect prices to touch Rs 1,000 levels as India is expected to export more than 8 million bales of cotton in the current season.

Among major spices, pepper prices gained more than 60 per cent on account of lower global availability resulting from erratic weather in Vietnam, Indonesia and India. In 2012, pepper may witness downside pressure owing to high pepper output estimates in the global markets and we expect the commodity to touch Rs 28,000. Jeera prices which remained under downside pressure in the second half of 2011 are expected to bounce back on expectations that unfavourable weather conditions may hamper jeera output in 2012. Prices may touch Rs 19,500 levels during the year. 

Each year brings hopes of better prospects for all. Vibrations in the financial arena at this point of time are no different and we expect the global economic scenario to smoothen by the second-half of the year. Keeping this in mind, commodities point towards a new trajectory this year, which should not be missed.

(This story was published in Businessworld Issue Dated 23-01-2012)