Commodities Market Outlook

Commodity prices are in an uptrend and this phenomenon is seen across the commodity basket. Karan Bhojwani and Nikita Singh shares the outlook on commodity market and analyses the demand-supply equation in the commodity markets

Commodities in the world economy saw a stark rise in prices in 2017. After being earthward bound for over four years, the commodity prices recouped in 2017 in the Indian markets as well in line with the global trend. In an economy shaken by some historic initiatives and tax reforms, the rise in commodity prices were not only suggestive of revival and growth in the economy but it came as a consolation for businesses engaged in commodities. Going forward, the likely event of rupee depreciation will also prove to be a boon for commodity exporters who may pass on the derived benefit to the growers.

In the energy segment, while the easing of production restrictions in China cooled down the coal prices in the first half of the year, prices of thermal coal and coking coal, which are largely used in electric and steel industries, have remained high on the back of low inventories and natural disruptions. The coal prices are likely to hit an average of USD 70/tonne by the end of 2017 (up 6 per cent from 2016) as a result of China's continued efforts to reduce coal supply. The prices of this industrial commodity are likely to be influenced by China's coal policy. In a similar tone, natural gas has recorded an increase of 6 per cent in its prices as a consequence of strong demand and tight supply. Natural gas prices are expected to rise 15 per cent by the end of 2017 with the US being the key driver of its demand. The global oil industry recorded an 8 per cent surge in its prices in the first half of 2017, despite the tussle between the US shale oil recovery and OPEC's production cut proposition. The crude oil prices are expected to touch an average of USD 55/ bbl by the end of the year, recording an increase of 26 per cent against 2016. The prices are further expected to go up to USD 60/bbl in 2018 on strong compliance of OPEC production cut proposition, persistent rise in demand and rising production cost.

The prices of agricultural commodities showed mixed price movements in 2017, as prices of beverages plunged following the drop in cocoa prices, raw material prices surged on the back of rally in natural rubber prices, while grain prices remained high during the year. While the price of beverages are forecasted to slump further, the food commodity prices are expected to rise through 2020 with a constant upsurge in food and raw material prices. Popular agriculture commodities, including cotton, tea, coffee, natural rubber and grains are likely to record a robust growth in their prices in the near term. While the production of these commodities has also steadily increased, the unprecedented production losses and strengthening global demand is likely to move in favour of a notable price rise.

The fertilizer prices have substantially increased in the first quarter of 2017, with urea prices going up by 16 per cent, DAP by 9 per cent and nitrogen prices by 15 per cent during the year. Phosphate prices rose for the first time in eight quarters after China's phosphate manufacturers implemented a strategic production cut from December 2016 onward. Despite the oversupply of a large number of fertilizers, the fertilizer prices are expected to go up at a moderate pace in the medium term due to higher demand and increasing energy cost, which will further attract investment in primary and processed fertilizer supply.

The geopolitical tensions have led the precious metals to attract considerable interest from the investors. Despite volatile price movements, the prices of platinum, gold and silver went up, posting a sizeable price rise in 2017. Further, the geopolitical tussle in the North Korean peninsula may continue to be a more dominating factor in determining the movement in prices of precious metals despite a rise in the US Federal Reserve interest rates. The rise in US Fed Reserve rate poses a downside risk for the prices of the precious metals. Strong physical demand for gold in China and India, delays in US Fed rates and a shortage in mine supply will work as additional factors to send the precious metal prices spiralling to a new high.

The outlook for metals is positive for the coming year as well. While overall commodity performance remained subdued owing to softness in the crude oil prices, non-ferrous metals hae remained a strong bet because of increase in metal prices globally and derived improvement in sales realisations for the vendors.

COPPER

According to a Care Ratings report, copper has turned into a noteworthy industrial metal, positioning itself third after iron and aluminium in terms of quantities consumed. Compared with the global markets, India has restricted copper ore stores constituting around 2 per cent of the world copper reserves. India remains at number seven as importer of copper, adding up to $3.3 billion in the world list as per the imports for the year 2016. The global mined copper production increased at a CAGR of 4.9% between CY12 to CY16. Copper production grew 5.6 per cent YoY in CY 16 compared with 3.8 per cent in CY15 and 1.4 per cent in CY14. World mine production of copper is estimated to have declined by around 3.5 per cent in the first quarter of 2017, due to a decline in production in Chile. Demand from China, the world's top consumer, is one of the major factors that drive the copper market. Copper costs saw a decline from FY2014-15 onwards due to decline and logjam in the Chinese economy. In FY2017-18, prices of copper have risen above the FY2016-17 level as both Chinese and US economies showed signs of positive outlook. Moreover, prices held firm after an earthquake in the main copper producing region of Chile supported the upside in the copper prices. Chile's President Michelle Bachelet said her administration is set to achieve what no other government has managed to do for half a century to reduce the nation's dependence on copper and diversify the economy.


In the short term, the prices of copper may well move in a range due to weak Chinese demand and macroeconomic indicators showing signs of slowdown. However, considering the long term outlook, prices could soar higher as the demand outlook for electric cars improves. Many market participants expect the need for copper to increase as electric cars become more popular. It is estimated that while cars with internal combustion engines require up to 23 kg of copper each, a hybrid vehicles uses 40 kg of copper - nearly twofold increase.

LEAD

Lead, the fourth most-used metal worldwide, has the largest applications in batteries and communications. The metal can be recycled indefinitely without losing its properties, with such recycled metal accounting for more than 60 per cent of the total production. After starting the year 2016 at less than $1600 per metric tonne, lead prices had underperformed the other base metals for most part of 2016, but lead prices took a dramatic turn in the last quarter of CY2016 due to shortage of the metal in China as a result of mine closures. The US Geological Survey also notes that supply was further constrained by mine closures in Australia and reduced US output. In addition, the metal benefited from seasonal battery demand, which increased the market's appetite for the metal.

Lead prices have seen a decent upmove so far this year, posting a gain of 18 per cent on the London Metal Exchange so far as supply constraints exacerbated on account of because of China's environmental crackdown, solid demand and falling inventories in Shanghai. China represented around 40 per cent of worldwide lead demand, assessed at around 12 million tonnes this year. The reports assess that the lead market will see little shortfall this year and the next. The National Bureau of Statistics recently said China's lead yield was the lowest since November 2016. Also, China's decision to boycott imports of several more commodities from North Korea (in August) implies about 10 per cent of its universal lead mine supply will be blocked.

Certainly, things are looking better for lead and this metal may possibly have a bright future in the next few years as supply continues to decrease and demand picks up, supported by Chinese consumption and worldwide battery demand.

ZINC

Zinc is the brilliant white metal utilized for the most part in galvanisation of steel and iron. After a glimmering performance in the year 2016 as this metal took off by 60 per cent on the back of closure of two top mines in 2015 and production cuts from mines, the first half of the year 2017 had a lukewarm show when contrasted with same period in the previous year.

Zinc demand is on the rise to a great extent as the metal is progressively being used in new applications. Generally, it has been used to galvanize steel and in the production of alloys, including brass, yet of late more of its applications are come to the fore in health, battery and agriculture sectors. Mining magnate Robert Friedland has highlighted the use in agriculture, stating that the governments of countries like China, India and Pakistan are ‘supporting zinc additions to fertilisers when it is put in crop rotation.'

Recently, zinc rallied to a decade high and the metal is continuing to find support from renewed bullish sentiments amid stock market declines.

The broad consensus for zinc is that the metal's prospects are good. The positivity is largely based on the fact that the big mines have been closed and there are not enough new mines to replace their output. At the same time, the demand outlook from the US seems bright. In addition, total global zinc inventories have been on a downtrend since the beginning of the year.

ALUMINIUM

Aluminium is the most widely used non-ferrous metal. Over the decades, aluminium consumption growth has outpaced all other metals. The world's leading aluminium market is China and other major consumers of aluminium are Japan, Europe and the US. The main industries with highest aluminium consumption are construction, transport and packaging. In the developed countries, the demand for aluminium comes mostly from the rapidly growing transport industry, which is driven by an expanding auto market. Additionally, developing countries are expanding their infrastructure; therefore, the demand from the construction sector has been upbeat. Aluminium prices have soared around 24 per cent on a YTD basis. Aluminium, like other commodities, is driven by an underlying demandsupply equation. The year 2016 was the first year in a decade when aluminium markets entered into a supply deficit. Better-than-expected Chinese demand coupled with lowerthan- expected Chinese supply supported aluminium prices.

Considering that China accounts for nearly 60 per cent of global production of aluminium, the Chinese government's crackdown on excessively polluting aluminium smelters with help prices to remain firm. Aluminium demand will receive a boost in the mid-term, as automotive production is likely to be on an upsurge. Even if automotive 

production does not increase, automotive material substitution will prevent aluminium production from dropping.

CONCLUSION: The commodity prices have hit an upward trajectory in the current year and are likely to continue the momentum in both near term and medium term period. The oil prices are likely to rise on production cuts by oil majors and natural gas prices are likely to hit considerable highs on supply discrepancies. On the other hand, the price movements of coal, coking coal and thermal coal is largely dependent on China's coal policy. The agriculture prices will be on a high on the back of rapidly growing demand while fertilizers are likely to rise as well on better demand and growing produce in the sector. Further, the prices of precious metal is also likely to rise on nuclear threats and geopolitical tensions. Non-ferrous metal prices surged during the last one year. The prices are expected to hold steady in the coming times. Activity in China will play a major role for the price movement of non-ferrous metals as the country is one of the largest consumers and producers of non-ferrous metals. The commodities are forecast to either re-balance in the near term or exhibit a bullish undertone, thus safeguarding higher profits for businesses trading in commodities.

Jay Purohit, Technical & Derivatives Analyst, Centrum Broking Limited

Base metals bottomed-out in start of the calendar year 2016 and had a healthy rally till December 2016. But, they plunged in the following six months mainly due to rising inventories and disappointing data from China, which is the world's largest consumer of metal. However, the base metals formed a base in June 2017 and resumed their broader uptrend.

On individual metals front, the leader amongst the metal group i.e. COPPER has recently retested the ‘neckline' of an ‘Inverse Head & Shoulder' pattern, from which it had given breakout in August 2017 on weekly chart. The minimum target of the mentioned pattern comes to Rs. 470 — 475 on MCX, which seems to be achievable in coming quarter.

While, the ALUMINIUM had a decent rally in last couple of years without any significant correction. In August, ALUMINIUM gave a breakout from the ‘Bullish Flag' pattern on weekly chart and managed to sustain at higher levels. As a result, it crossed the crucial hurdle of 130-134 zone with an ease and closed above the same on monthly chart. At current juncture, there is no sign of reversals seen  Better-than-expected Chinese demand coupled with lowerthan- expected Chinese supply supported aluminium prices.on chart and till the time, it holds 130-134 zone, we won't be surprised to see 155-160 levels in coming months.

ZINC moved within a territory of a ‘Rising Channel' for six years from the start of calendar year 2010. In November 2016, it gave an upside breakout from the mentioned pattern and rallied further. However, it again retested the breakout levels in June 2017 and rebounded piercingly. Recently, ZINC crossed its previous high 208.40 and is trading at ‘All TimeHigh' on MCX. Since, the momentum oscillators and a set of moving averages are placed positively on weekly and monthly chart, the ongoing optimism in ZINC may continue in near term too. Considering the current chart structure, ZINC has a potential to rally towards 235 — 240 levels in coming months. The mentioned bullish view will get negate on a close below its previous swing low of 190.70.

The LEAD too had a bull run in line with its peers; but unlike the above mentioned base metals, it has not yet crossed its '52 weeks high' of 175.70 (which it formed in November 2016). At current juncture, we are witnessing a formation of a Bearish Harmonic Pattern called ‘Bearish AB=CD' pattern on the daily chart of LEAD. The Potential Reversal Zone (PRZ) of the mentioned pattern is placed around 173 levels. Thus, it would be a daunting task for the LEAD to sustain above its strong hurdle of 173 — 176 zone in near term. On the flipside, strong support is placed at 152 and 143 levels.