Collateral Damage

Rahul Oberoi/Money Today        Print Edition: April 2011

If you are a commodity investor invested in iron ore, palm oil or chana alias chickpea, or are planning to put some money in these commodities, it may be worth taking a closer look at the recent budget proposals. Finance Minister Pranab Mukherjee has proposed to hike export duty on iron ore and has also allocated Rs 300 crore each for promoting palm oil and pulses production. Chana being the lone member of the pulses family that is traded on the commodity exchanges will feel the heat.

Market experts believe the government's move could slow down the pace of returns from these commodities in the long-term. In a detailed analysis, we tell you why you need to be wary of placing your bets on the three commodities.

IRON ORE

The government plans to raise the export duty on iron ore fines from 5% to 20% and on lumps from 15% to 20%. Fines are ore particles that have iron content lower than in lumps. Rahul Dholam, senior research analyst, Unicon Securities explains, "If export duties on both iron ore lumps and fines are increased to 20%, we will definitely see a reduction in exports of iron ore from the country. This is negative for investors in the long term as it could increase domestic supply. We will surely see a fall in prices."

"Iron ore futures on the Multi Commodity Exchange (MCX) could find strong support at Rs 7,350 per dry metric tonne (dmt) and thereafter at Rs 7,220 per dmt. There could be resistance at Rs 7,750 per dmt and then at Rs 7,830 per dmt," says Jayant Manglik, president, Religare Commodities.

However, on the flip side, the domestic steel industry will be a major beneficiary. The move could mean lower input costs for the steel industry as iron ore is the main raw material used for pig iron production which, in turn, is used to make steel. About 98% of the mined iron ore is used for this purpose. "Clearly, domestic steel companies are set to benefit as iron ore prices will stabilise," adds Manglik of Religare Commodities.

Analysts say the sustained demand for iron ore and steel- from China and India-has made the government propose an increase in export duty on iron ore. Though demand may remain higher than supply in the near-term, some increase in iron ore availability from local mines will certainly help stabilise domestic steel prices.

The finance minister, in his budget speech, has also proposed scrapping of import duty on stainless steel scraps to help producers lower their cost of production. The government estimates domestic steel production to increase to 120 million tonne (mt) by the end of 2012 from 70 mt in 2009-10. Meanwhile, domestic steel consumption was up 9.8% to 29.82 mt between April and September, 2010 against 27.15 mt over the same period last year. In September-November 2010, steel demand was up 4.1% to 4.72 mt against 4.53 mt in the year-ago period.

"Steel could find strong support at Rs 24,750 per mt and then at Rs 25,000 per mt. Resistance could be found at Rs 29,850 per mt and then at Rs 32,000 per mt. On 4 March, 2011 at the National Commodity and Derivatives Exchange (NCDEX), it was trading at Rs 29,650 per mt," says Ashish Shah, member, management committee for commodities at Mumbai-based brokerage house, Sushil Finance.

PALM OIL

India is one of the largest importers of vegetable oils. Ignoring expectations of an import duty cut-currently at 7.5%-in this budget, Mukherjee, instead, decided to earmark 60,000 hectares of land and Rs 300 crore for palm oil production to meet the ever-increasing demand. The initiative is expected to yield about 3 lakh mt of palm oil annually in the next 5 years.

This is expected to reduce the country's dependence on imports and lead to a fall in prices. Ankita Parekh, research analyst, Geojit Comtrade says, "If the budget plans are implemented and if we get an average 3,000 tonnes per hectare productivity, we could see improved domestic availability over the years and some cooling down of prices which have risen from Rs 300 per 10 kg to Rs 605 per 10 kg in the past one year."

India produces close to 60,000 tonnes of palm oil and imports on an average 6.5 mt, annually. On March 4, 2011, crude palm oil was trading at Rs 566.35 per 10 kg on the NCDEX.

CHANA (CHICKPEA)

India is one of the largest producers and consumers of chana in the world. The country grows close to 5-5.5 mt of chana annually, about 70% of the global production, of which only 2 lakh tonne is exported. The finance minister's plan to promote 60,000 villages in rain-fed areas for production of pulses has left commodity investors unhappy. "Chana production is expected to be close to 5.4 million tonne during this calendar year because of expanded acreage in Rajasthan following good rains. If the above gets implemented we could see an increase in domestic production thereby lowering India's dependence on imports," says Geojit Comtrade's Parekh.

Shah of Sushil Finance, however, believes that prices may hold in the short-term. "A lot would depend on the rains this year, and any delay in the monsoon would offset productivity, hence, prices may not correct sharply. In the short and medium term, we do not see any negative impact on prices. However, the finance minister's plan, announced in the budget, for promoting pulses villages would give a boost to the domestic supply. This would lead to softening of prices in the longer term," he adds.

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