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Weak investment, low physical demand to exert downside pressure on gold

Expect base metal prices to trade lower as investors are keeping an eye on US rate decision. However, favorable Chinese industrial production along with supply cuts will restrict sharp fall.

Naveen Mathur | February 9, 2016 | Updated 12:04 IST

Naveen Mathur, Associate Director of Commodities and Currencies, Angel Broking
Fortnightly Performance

Non-Agri Commodities 

Source: Reuters, Angel Research
On a fortnightly basis, the global equity markets traded on a mixed note owing to number of global developments that prompted the traders to refrain from placing risky bets. From the European front, the ECB served up a package of stimulus measures that fell well short of many investors' expectations. ECB reduced the deposit rates by 10 basis points to minus 0.3 percent and extended its bond-buying program by at least 360 billion Euros by six months. This move was a major disappointment from a central bank whose offerings have typically exceeded market expectations. Moreover, crude sank to a seven-year low as OPEC decided not to slash output thereby triggering huge outflows from emerging markets. From the US front, investors are still fearful to make any risky investments as the US rate hike decision looms closer.

The Indian Rupee depreciated by 0.76 percent in the last fortnight owing to the bullish overseas sentiment in the face of impending Fed rate hike after the hawkish comments from US Federal Reserve Chair acted as a negative factor for the emerging markets including India. Moreover, investors' sentiment took a hit on sustained foreign fund outflows and a weak trend in other Asian markets. Domestic markets i.e. Sensex and Nifty remained pressurized in the previous week as investors' hopes dwindled that a crucial tax reform would be cleared in the ongoing winter session of Parliament. On the contrary, the finance ministry spoke about raising the shareholding cap for foreign bourses in domestic stock exchanges from 5 percent to 15 percent. Moreover, the ministry expects to mop up Rs 6.46 lakh crores from indirect taxes in FY16, a growth of around 19 percent over last year.

In the past fortnight, spot gold prices traded higher by 1.52 percent to close at $1074.51 while MCX gold prices rose by 2.5 percent to close at Rs.25679 per 10 gms. Prices rose as after the European Central Bank (ECB) announced the minimum cut in its deposit rate that investors had been expecting.  The ECB cut its deposit rate to -0.30 percent from -0.20 percent, but left its main refinancing rate, which determines the cost of borrowing for banks at the ECB's weekly auction, unchanged at 0.05. Also, the rate hike at the Dec. 15-16 policy meeting would be the first in nearly a decade. Federal Reserve Chair Janet Yellen said she was "looking forward" to an interest rate hike that will mark the U.S. economy's recovery from recession.

International silver prices declined by 1.07 percent while MCX silver prices rose by 0.84 percent in the past fortnight. Price decline is in contrary to the rise in gold prices. Weakened dollar index did not provide much cushion to the falling silver prices.

LME Copper prices reversed losses and gained 2.8 percent in the last fortnight as Freeport McMoRan Inc. (FCX) said it would cut its production by 350 million pounds, up from an initially announced 250 million. Besides, 10 major copper smelters in China, the world's top copper consumer, said on Tuesday that they would cut output by 350,000 tonnes next year, and also asked the government to buy metal for its strategic stockpile. Moreover, China imported 460,000 metric tons of copper and copper products last month, up 9.5% from November 2014 although China's imports fell for the 13th consecutive month with 8.7 percent decline in November compared to a year earlier. However, sharp gains were capped as Federal Reserve Chairwoman Janet Yellen commented that the U.S. economy appeared to be strengthening, thereby signaling that the Fed will raise rates in its December meeting. MCX copper prices surged by around 7 percent in the last fifteen days in line with international trends.

In the past fortnight, WTI oil prices declined by around 14.6 percent while MCX crude oil prices also rose by 14.82 percent. Surging U.S. stockpiles and a stronger dollar prompted traders to dump crude contracts amid signs the world's largest oil producers will not cut production when they meet this week. Warmer-than-usual weather in the Northeastern United States, a major market for heating oil, also weighed on the petroleum complex.  In its latest monthly report, the Organization of the Petroleum Exporting Countries forecast that oil supply from countries outside the group - including United States and Russia - would fall by 380,000 barrels per day (bpd) next year, three times above previous expectations. But OPEC also struck a bearish chord by saying its group output rose by 230,000 bpd in November to 31.7 million. It left unchanged its forecast for 2016 world oil demand growth at 1.25 million bpd.

Outlook

Investors will remain at bay to watch before the US Federal Reserve meeting on 15-16th December. Besides, weak investment demand and low physical demand will exert downside pressure on the yellow metal .

OPEC is continuously pumping more than 30mbpd exceeding their target quota for last six months in a row. Oil markets are supplied with ample inventories, besides, low demand from china will also act as a negative factor.

We expect base metal prices to trade lower as investors are keeping an eye on much anticipated US rate decision in December 15-16 meeting. However, favorable Chinese industrial production along with supply cuts will restrict sharp fall.





Agri Commodities

Source: Reuters, Angel Research

Rabi crop sowing picked up speed in last couple of weeks however; the overall area is still lower by 91 percent from the year-ago period. As per the latest data released by government, the total area sown under rabi crops is reported at 442 lakh hectare compared to 486 lakh hectare reported a year ago. Last week, only 370-lakh hectare was under rabi crops.

During last fortnight, the most active NCDEX Chana Jan contract closed higher by 1.1 % to close at Rs. 5,058 per quintal.  Chana prices increase due to good demand from retail buyers even at higher prices as stocks are diminishing at faster rate. Government has started auctioning of the seized pulses to control the prices. As per data release by Agriculture Ministry, Chana is planted on 69.25 lakh ha, slightly lower compared to last year acreage as on Dec 04. As per the latest data by State agri department, acreage under Chana in Rajasthan reported at 11.76 lakh ha down by 18.8 per cent compared to last year while Maharashtra the area is higher by almost 31 per cent at 9.11.58 (CCEA) has given its approval for creation of buffer stock of pulses. The buffer stock will be created in current year and approved procurement of about 50,000 ton pulses from the kharif crop 2015-16 and 100,000 ton out of arrivals of Rabi crop of 2015-16.

Soybean price for January delivery on NCDEX fell about 7.2 per cent during the last fortnight due to limited demand, moreover lower demand for soy meal and higher import of vegetable oil too pressurize soybean price. Similarly, the soybean on Cbot also slump about 0.26 per cent during the fortnight to close at $8.775 per bushels. The prices are under pressure by the South American production forecast maintaining a favorable pattern on forecast of rain to persist across Brazil's soybean belt well into late December. Large stocks of soybean may release from Argentine and pressurize the world price if President Mauricio Macri cut export duties and let the currency devalue.

The most active RMseed Jan'16 contract on NCDEX fall about 3.4 per cent to close at Rs. 4,650 per quintal during last fortnight. This fall is attributed to improved sowing progress in Rajasthan and Uttar Pradesh. Moreover, lower demand for meal export and favorable crop condition in mustard producing States further pressurizing the price. As per the Department of Agriculture, Rajasthan, the area under Rape & Mustard is pegged at 23.21 lakh hac as on 7 Dec 2015 lower by 9 per cent compared to last years' area during same time. This year the target of sowing in Rajasthan is 27 lakh ha against five years average of 25.48 lakh ha.

Ref. Soy oil price for Jan'16 delivery on NCDEX, increased by 2.5 per cent from to close at 633.9 per 10 kgs. This surge is due to good demand among stockists for soy oil from stockists and traders on reports of import duty rise. The Agriculture  Ministry  has  proposed  further  hike  in  import  duty  of  edible  oils  by  5  per  cent  in  a  bid  to  protect  the  interest  of  farmers.  In CBOT, the soyoil prices for the most active Jan'16 contract surged about 7.84 per cent during the fortnight to close at 31.36 cents per pound. Strength in soyoil is due to hope that a U.S. biodiesel tax credit would be switched to producers from blenders, which could limit imports of soyoil and boost demand for domestic supplies.

The CPO prices on MCX for December delivery surged by 7.46 per cent to close at Rs. 409.6 per 10 kg last fortnight. This increase in price is due to good demand from the stockists. Similarly, Malaysian Feb'16 palm-oil futures gain about 3.34 per cent to close at 2,441 Ringgit / tonne. Malaysian palm oil futures jumped on forecasts of rain in key producing areas heightened concerns over supply disruptions in the monsoon season. The country's total crude palm-oil production in November fell 19% from October to 1.65 million metric tons, according to the Malaysia Palm Oil Board (MPOB).

Among softs, cotton and kapas traded higher on on reports of better exports figures and anticipation of better demand from the mills for good quality cotton. During last fortnight, MCX Dec'15 contract closed after recovered about 1.6 per cent from its low at Rs. 16,180 per bale. Similarly, NCDEX Kapas gain 5.7 per cent to close at Rs. 872.5 per 20 kg. India contracted about 3 million bales (170 kg =1 bale) until Nov 30 this year that was only 2.2 million bales last year, according to industry sources However, ICE cotton traded lower as upward move limit demand from the mills. Further, US cotton export sales were down 73 percent from the prior week and down 64 percent from the prior 4-week average.

The NCDEX Mar delivery Sugar gain 5.9 per cent to close at Rs 2,976 per quintal due to better export prospects and lower cane production. However, ICE raw sugar Mar'16 fall by 2.61 per cent during last fortnight on reports of drop in ethanol sale in Brazil as per reports by Unica. The prices are also under pressure on anticipation of softer demand at higher prices.

During the last fortnight, spices complex traded mostly on negative note except coriander, which surged about 5.4 per cent.  Coriander prices have improved due to lower supplies, diminishing stocks and good export demand. Cardamom, Jeera and Turmeric falls during the last fortnight. Cardamom prices fell as supply outstripped demand at auctions held in Kerala and Tamil Nadu. It is expected that the production will be at higher side due to good weather conditions during second and third picking. Turmeric prices have corrected due to profit booking though the demand is steady in the spot market on concern over production next year. For jeera, there are reports on due to low demand and pickup in jeera sowing in Gujarat, the main growing state. According to Dept of Commerce data, the export of jeera during first 5 month of 2015-16 (Apr-Sep) is 44,140 tonnes, which is, lower as compared to last year same period

Outlook

Chana price may trade sideways as govt to import 10K tonnes of pulses to check prices. Reports of good sowing progress and expectation of increased supplies of seized pulses may pressurize prices. However, lower than expected arrivals with good demand is driving the spot prices.

We expect Soybean prices to fall on expectation of higher arrivals and limited demand from oil millers. Moreover, muted export demand for meal to bearish for soybean crop. However, lower production estimates may be little positive for prices.

We expect CPO prices to trade higher on expectation of raising prices in international market on reports of lower production in Malaysia and Indonesia in coming months may support price at higher level but Higher-than-expected palm oil stockpiles could cap price rises. Expectation of revival of domestic demand too supports prices. However, higher inventory level in the country may pressurize prices.

We expect cotton prices to trade sideways to higher on reports rising export demand from Pakistan and other Asian countries. Report of falling output in the country also bullish for cotton. Moreover, ginners and stockist's interest to buy quality cotton is keeping prices higher. However, supply glut in the country may pressurize prices in the domestic market.
 
Among spices, turmeric may trade sideways to higher on concern over production for 2015-16. However, higher arrivals may pressurize the cardamom prices on conductive weather for its production. Jeera may trade sideways to lower on subdued export demand and good progress of sowing. Lastly, coriander may trade higher on concern over supplies due diminishing stocks in domestic market.




(The writer is Associate Director of Commodities and Currencies, Angel Broking)

 

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