A very common question always puzzles me as to how it can be answered as precisely as it is asked. At the beginning of every year analysts are popped a question, “How are commodity markets looking in the coming year?” Though the question is very simple the answer can’t be simple. That’s because the commodity markets are a complex web of commodities driven by various segments of the economy and influenced by a wide array of fundamentals, from the weather to labour unrest, natural calamities to policy actions, and the health of the global economy and demand prospects. Let’s look at what could be in store for 2013.
The thought of commodity markets brings gold and silver to the top of our minds. Both the precious metals have lived up to their safe-haven status during the financial crisis which began in late 2007 and has continued until now, but they appear to be losing some of their sheen of late. Gold and silver both had a wobbly start to the year, despite an open-ended asset purchase programme (QE3) put in place by the US Federal Reserve and the persistence of risk in the macroeconomic conditions due the uncertainty around the fiscal cliff.
Does that mean the rally in gold and silver has been overdone? The performance of gold in 2012 was erratic, which raised concerns for traditional gold bulls and questioned the future of gold. There are three major reasons for us to be bearish on gold over the short term. The first one is that there is no new financial crisis building in the market; most of the bad news is already in the price. Secondly, the recent erratic performance coupled with reduced demand for safe havens has reduced investor interest in gold, which is clearly evident in the falling monthly cash flows into Gold Exchange Traded Funds across the world over the last five months. The third and the most important one is softer physical markets—after the prolonged bull run the buyers have now become more price-sensitive and the largest buyer (India) is trying to reduce its imports of gold, which may have a long-term impact on international gold prices.
As the concern for safety diminishes, the dollar also could weaken against other currencies and against the rupee as well. But dollar weakness also doesn’t seem to be helping international gold prices too, and indeed the correlation of gold with EUR-USD has fallen to 25% over the last three months, which means the falling dollar is not pushing up gold and the appreciating rupee will put additional pressure.
We remain cautiously bearish on precious metals and expect them to correct by another 10-12% this year
Metals and energy
It is quite natural that metals and energy commodities are driven by larger business cycles. While 2013 appears to be set against some positive backdrop and return of growth in countries like China and the US, there are enough doubts on sustainability of strength in these commodities.
Metals are plagued by a huge inventory build-up in China and a constant rise on the London Metal Exchange warehouse stocks indicate continued surplus in metals. Copper should be returning to a surplus scenario after many years and the surplus in nickel could double this year.
The initial part of the year could see some strength in non-ferrous metals prompted by improved global sentiment and some short covering, but sustainability of this rally could be difficult, as the supply-side fundamentals may overtake the demand side by the second half.
Crude oil has been booming of late with improved demand outlook with the recovery in global macroeconomic conditions. China has been cracking crude at record rates and with its import growth at a healthy rate of 3% year-on-year, the demand looks promising.
But the supply side is also equally reciprocating the demand with the US producing 14% higher crude. And with production reaching the highest point since 1996, the West Texas Intermediate (a light crude oil) could remain fairly discounted to the Brent crude oil which would be influenced by escalating tensions in the Middle East, but the large spare capacity in some Organization of the Petroleum Exporting Countries (Opec) nations is assuring the markets that supplies would be stable.
Crude oil is one commodity which is having equally strong push and pull factors, and the catalyst for the direction could emerge from escalating tensions in the Middle East.
We have just come out of a major drought year in the US, the world’s largest producer of commodities like corn and soyabean. As the global demand for food continues to rise, the inventories are under pressure. The latest forecast for world cereal stocks at the close of the crop seasons ending in 2013 stands at around 495 million tonnes (mt), down 5% from their opening level. World wheat inventories are expected to fall to 163mt, down 11% from their opening level and 2% less than what was reported in November.
There is upward push in the spot prices as farmers continue to hold their inventories in many commodities and could see some strong upward trends in some of them in the coming months.
To conclude, there is no specific trend to the commodity markets and the coming year would be driven largely by individual fundamentals of the respective commodities rather than the hot money chasing them.
Kishore Narne is associate director and head, commodity and currency, at Motilal Oswal Commodities Broker Pvt. Ltd in Mumbai.