Demand growth in commodity markets seen modest

Despite signs of recovery in demand and supply, global commodity markets covering energy products, metals (base, precious and industrial) and agriculture continued to remain vulnerable to a clutch of uncertainties including sustained global economic growth, monetary policy, exchange rate, geopolitics and not the least, weather.

Many of these factors played out in their own way the whole of 2013 – some favourably like the weather, and some otherwise, like geopolitics and monetary policy – but they all have refused to go away. Most of the driving forces will be around in 2014.

Last week saw precious metals generally down with gold declining by 1.6 per cent, silver by a hefty 2.2 per cent and platinum by 0.7 per cent. Palladium was the lone exception with price gain of 2.3 per cent over the week.

On the other hand, LME base metals ended the week on the positive territory with prices up for nickel (1.9 per cent), tin (1.6 per cent), aluminium (1.4 per cent) and zinc (1.2 per cent) over the week. Copper stock drawdown continued during the week with four per cent of the total inventories going out of London, New York and Shanghai warehouses.

Come December, as the West goes into holiday season, activities in the commodity space turn less hectic. A relatively stable geopolitical situation, rising probability of Fed tapering, benign weather so far and positive growth momentum will deliver their combined and several impact on commodity markets in the months to come.

The supply side is expected to be comfortable while the demand side needs a close watch.

Prices have dipped below $1,250 an ounce and have struggled to gain traction.

The physical market is not supportive while disinvestment is yet to slow. ETP outflows in November were an estimated 40 tonnes. Investor sentiment remains bearish towards the yellow metal.

However, precious metals rallied on Friday. In London, gold PM Fix on Friday was $1,233, up from the previous day’s $1,223 triggered mainly by short-covering.

Silver AM Fix was $19.49 versus previous day’s $19.46. Platinum ended the week at $1,376, marginally higher from the previous day while palladium showed a robust jump to $741 ($728).

For gold, the price risks are skewed to the downside. The saving grace, albeit temporary, is the Chinese demand for the New Year which falls towards the end of January. Indian consumption even during the current seasonally strong months (wedding season) has been tepid.

There is demand resistance at high prices and expectation of a price fall means postponement of buying decision. The price of $1,200/oz seems to be a key level at which some more physically-backed ETPs will turn loss making.

Most base metals have faced surpluses this year so far; but looking at the demand side, it is becoming increasingly clear that surpluses are shrinking while leading manufacturing indicators signal that consumption will continue to strengthen.

This should at least help cushion the downside for prices, according to experts who suggest that the balance of risks for base metals is shifting to the upside.

Prices have not reacted strongly to demand growth because of steady supply increases and expectations that it will continue.

Supply growth over the last four years has been the strongest ever, commented an expert.

On Friday, LME cash copper closed at $7,120 and aluminium $1,735 a tonne.

With the easing of geopolitical tensions following an interim agreement with Iran, market-men are training their attention on fundamentals. Demand-supply is well balanced on current reckoning.

While the outlook for oil prices in the months ahead appears fairly stable, there is belief that the risks of an oil price spike are skewed more to the upside than to the downside given the unstable situation in West Asia.

However, the big question is what if supplies from Libya, Iraq and Iran return to the market with a bang.