New year may prove positive for commodities

For a major part, the year 2013 was characterised by several uncertainties covering global economic growth, geopolitics, monetary policy, currency dynamics and weather.

Mercifully, the current year has begun with a somewhat clearer picture. Although still not really back to trend, global economic growth has begun to gather momentum under the lead of the US. Geopolitical tensions stand substantially reduced although there is always an undercurrent of uncertainty.

As for monetary policy, the US Fed has finally made up its mind to begin to taper (reduce asset purchase) gradually beginning this month. Currency market is sure to take a cue from this and possibility turn less-volatile.

Weather across the world in 2013 was benign resulting in a rebound in agricultural harvests and softer prices.

On current reckoning, a similar benign weather is widely expected for 2014 although it must be stated that the world is just one El Nino away from a production decline. The year 2014 has, therefore, begun with a lot more clarity than was the case even a few months ago.

Taking various factors into consideration, the year may prove to be quite positive for commodities. Global growth is expected to tick higher. The continuing decline in the US unemployment should allow the Fed to continue to taper gradually; and tapering by itself is widely seen as a vote for stronger US growth with consequential positive effect on commodity demand, especially energy and industrial metals.

The Chinese commodity demand too looks promising despite some slowdown in economic activity and GDP growth rates. Labour statistics last week showed the US economy generated a net 74,000 new jobs in December 2013, far less than anticipated.

In 2013, the job growth averaged 1,82,000 a month, nearly unchanged from the previous year, demonstrating that the job market was steadily but surely improving. Another positive was the Chinese trade data.

The year 2013 ended strongly with December data showing broad-based expansion in energy and metals imports. However, the full year growth was muted. Last week, all precious metals except silver gained.

In the London market, platinum was the outperformer with a gain of 1.5 per cent to end the week at $1,425 an ounce while palladium followed with a gain of 1.2 per cent to end at $737/oz.

Gold was up 0.8 per cent, but silver bucked the trend, down by 1.9 per cent over the week.

Oil WTI too was down 1.9 per cent. LME base metals had a mixed week.

While zinc and aluminium edged lower, lead was down by a steep 2.5 per cent. Copper remained unchanged over the week with exchange inventories falling and tin enjoyed a win of 1.9 per cent in price gain.

With traders coming back from holidays, activities are expected to pick up momentum.

With a price collapse by nearly a third last year, gold is likely to continue to face headwinds and struggle to hold on to its current levels. Physical demand continues to be weak with Indian government not keen to ease strict import rules, at least for the time being. Investor interest is clearly waning.

Net fund length in Comex gold has fallen by as much as 80 per cent. Its safe haven status does not hold anymore with expectations of economic growth, stronger US dollar and tame inflation.

Perhaps the biggest downside risk to gold price this year is the scope for further disinvestment. Improving equity markets and stronger dollar are other negatives. In London, Friday was a good day for all precious metals. Gold PM Fix was $1,244/oz, up from the previous day’s $1,226/oz.

Short covering and strong Chinese demand triggered a price spike. Silver too rose to AM Fix of $19.80/oz versus previous day’s $19.45/oz.

Platinum ended the week at $1,425/oz ($1,415/oz) and palladium at $737/oz ($736/oz).

Ahead of the Chinese Lunar New Year there is some buying interest that has emerged. But beyond that for the yellow metals the risks are skewed to the downside. No wonder, analysts worldwide are revising their price forecast down.

The focus of attention among market participants is the Indonesian export ban scheduled to come into force this week. So, supply risks dominate market thinking. If the ban remains in place for long, it would create supply disruption. Nickel is expected to be the most vulnerable if the ban continues for a length of time; however, high stocks will provide a buffer.

The impact of Indonesian ban was reflected on LME cash nickel on Friday when prices jumped to $13,805 a tonne, a rise of 3.9 per cent. Aluminium closed at $1,722/t and copper $7,330/t.

According to analysts, there has been a rise in open positions held across all of the LME base metals except aluminium.

“Alongside the rising open interest, base metals prices are trading lower across the complex, suggesting new shorts are the dominant flow’, commented an expert.

Geopolitical instabilities ensured that crude prices held up robustly in 2013. The situation is slowly improving for the better; yet, problems associated with Iran, Libya and Iraq have not gone away. While tensions have eased somewhat, supplies are improving. In particular, the US crude supply growth is accelerating. Emerging market demand too has been expanding strongly and is likely to continue in 2014.

The market, therefore, is likely to be a balanced one on current reckoning.

However, it must be cautioned that a tightly balanced market has the potential to run away because even a small change in either demand or supply will have a disproportionately larger impact on prices.