Commodities climb down2 min read . Updated: 02 Jul 2011, 01:52 PM IST
Commodities climb down
Commodities climb down
The massive sell-off in commodities last week could be good news or bad. Equity investors have quite reasonably seen the collapse in global commodity prices as a positive for the Indian economy. The stock market snapped out of a nine-day losing streak—the longest decline in more than a decade—as commodity prices tumbled.
India imports nearly three-fourths of its crude oil needs. Higher prices of several industrial metals are adding to inflationary pressures. More expensive oil has also threatened to unravel the government budget, through higher fuel subsidies. The Reserve Bank of India has already warned that the current account deficit could widen even further if global commodity prices remain firm. So, the steep price correction this month is a relief for India.
A more pessimistic view is that commodity prices have dropped like a stone because of expectations of lower demand in a weakening global economy. The price correction had more or less coincided with renewed fears that the US economic recovery is losing steam and growth in Asia could be hurt as central banks tighten monetary policy to curb runaway prices. The US has reported first-quarter growth numbers that did not meet consensus expectations, though the robust jobs data released on Friday balances the possibilities. The mild bounce in global commodity prices at the end of last week could be a technical move on the back of short covering by commodity traders, or a more positive reassessment of demand in the coming quarters.
To be sure, the global commodities rally had the characteristics of a bubble blown by financial speculators. Silver is the classic case. In fact, investment bank Goldman Sachs had warned as early as mid-April that prices were reaching unrealistic levels. Low interest rates and global uncertainty have sent investors to the relative safety of hard assets. Some nervous investors continue to see industrial and precious metals as more worthy of trust than paper currencies.
While the benefits of lower commodity prices to India are quite clear, there is cause for minor concern in case these lower prices are an indication of a more sluggish global economy. Strong exports in recent quarters have been an important driver of economic growth in India. Weaker demand in the global economy could hurt Indian exports.
The steep correction in commodity prices redistributes incomes from producers to consumers. Most economies should benefit, though nations dependent on commodity exports will likely have to live with lower revenues. As a net buyer of commodities, especially of crude oil and precious metals, India has more to gain than lose from the global sell-off.
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