Based on February data, the OECD composite leading indicators point to potential turning point in economic activity in the Euro area and regained momentum in other major economies. This should be positive for commodity consumption demand, especially growth-commodities such as crude and base metals such as copper. A weaker than expected US non-farm payrolls data rekindled hopes of further quantitative easing.

Global commodity markets witnessed relative quiet conditions last week. While crude markets eased somewhat, at the moment there is distinct lack of a catalyst to move prices up in the coming weeks, on the other hand, lingering global growth concerns, especially relating to hard landing in China are weighing on the base metals markets.

On the week, the base metals complex displayed divergent performance. All base metals – except lead and nickel – dropped. Copper prices were sharply down 5.1 per cent. Lead and nickel performed well despite the wider risk sell-off. All precious metals were down week-on-week, except gold which edged up by 0.2 per cent. The entire complex has been under pressure; but gold prices have gained some traction following suspension of strike by Indian jewellers. Concerns over Chinese slowdown impacted platinum and palladium.

As for steel, China's production has been getting stronger. March numbers point to an annualized production 725 million tonnes. March crude steel output was the second highest on record rising 3.9 per cent year on year and 3.1 per cent month-on-month (June 2011 saw record production at 729 mt), according to reports which emphasized that demand has been softer.

At five million tonnes, China's steel exports were seen surprisingly high. According to experts, usually steel exports correlate well with the arbitrage to either Europe or East Asia, but this seems to have broken down in March data – the arbitrage has widened in March but not by enough.

Rising exports could reflect a return of Indian demand. Anecdotal evidence suggests a number of Indian iron ore exporters have switched to exporting steel from China back to India as iron ore volumes have dwindled. If this is the driver behind March's rise in export, it could be hard to maintain these volumes in the near-term as India has raised the import duty on steel, putting pressure on the arbitrage, commented an expert.

Gold: On Friday, precious metals prices rose across the board as the dollar weakened on the day. In London, Friday gold PM Fix was $1,667 an ounce, virtually unchanged from the previous day's $1,669/oz. Silver, on the other hand, improved smartly with Friday AM Fix at $32.37/oz versus the previous day's $31.47/oz.

The yellow metal has gained some traction because of renewed expectation of QE3 in the US and reopening of jewellery shops in India. Indian jewellers after three weeks of downed-shutters have ‘suspended' the strike because they do not want to lose out on business. It is marriage season in India and Akshaya Trithiya – an auspicious day for buying precious metals – falls on April 24.

While the macroeconomic setting is largely gold positive, investor interest is still muted and physical demand is not exactly robust. The yellow metal is waiting for some trigger to provide direction. It looks like gold prices may stay range bound in the near-term with slight downward bias.

Base metals: All eyes are on China. Despite leading indicators pointing to renewed growth momentum in major economies, the base metals market continues to be weighed down by concerns over a potential slowdown in China and lower-than-expected Chinese GDP data. The growth momentum in the Asian major is likely to slow in Q2 and import and consumption demand may weaken.

Spot demand is soft currently with seasonal uptick in Q2 likely to be more tepid than normal. In particular, copper stocks are building and net imports may soften in the coming months. The market needs to wait for the time until demand conditions improve sufficiently to drawdown domestic inventories and force stock rebuild.

There is also overall optimism about global growth in the second half of the year and improvement in Chinese demand. This will prove bullish for copper prices in H2. So, price dips in Q2 may be seen as buying opportunities. One must hasten to add, overall, positioning in the base metals market has been very light, with the market lacking conviction and uncertainties rising high, according to experts.

Crude: Prices are likely to be range bound as most reports point to a balanced market signalling the end of two years of constant tightening. Prices are already high and there is no momentum to draw on. It will take a significant catalyst to force a change in price direction.

> gchandra@thehindu.co.in

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