The prices of key commodities, base metals, oil and cotton have fallen by 7-20 per cent from their recent highs in February this year. Prices of nickel, tin and aluminium have declined 13-20 per cent. Zinc, lead and copper have corrected by six to eight per cent and prices of Brent crude (oil) and cotton are down by six to nine per cent.
Sudakshina Unnikrishnan, commodity analyst with Barclays Commodities, said: “Commodity prices have corrected significantly in the past few weeks due to the re-emergence of growth concerns in China and the US, plus worries over Spanish sovereign debt.” Most analysts are bearish on commodity prices. The key ones are expected to decline during the second quarter of the current calendar year, as central banks in the US and Europe refrain from adding further stimulus, according to UBS AG. “In the absence of further injections in the second quarter, we expect prices to drift lower,” UBS analyst Peter Hickson said. Crude oil, copper, nickel and cotton may decline, his report said.
China’s imports of metals fell in March. For instance, copper imports declined eight per cent. The exception was agricultural commodities, where China’s imports of palm oil, sugar, soybeans and wheat (which hit an all-time high) went up. Only cocoa, coffee and corn imports fell month-on-month.
Goldman Sachs Group Inc cut its three-month outlook on commodities to neutral from overweight on March 28, saying most raw materials reached targets after gaining and economic growth may soften in the second quarter. The economy in China, the largest base-metals user, probably grew at the slowest pace in almost three years in the first quarter, expanding 8.4 per cent from a year earlier, according to the median estimate of 41 economists surveyed by Bloomberg.
“We are negative on the non-ferrous metal sector, as the slowdown in China and developed countries would keep prices subdued,” says the metals analyst at Nirmal Bang. The negative news flow surrounding the sovereign debt crisis in Europe and unlikely channelisation of the next quantitative easing into commodities would keep investment demand at a depressed level, analysts added. London Metal Exchange price assumptions are 10-15 per cent lower for all base metals in FY13 and FY14, as analysts are not confident about any global recovery.
Barclays’ Sudakshina, however, said that the fall in Chinese growth momentum was bottoming, unless there was a major negative macro shock, which seemed unlikely. She said one should avoid shorting from this level.
Metal analysts at Edelweiss Research expect Chinese steel production and demand to grow only three per cent in 2012, a weak scenario considering the historical average growth rate of 12 per cent. Chinese steel production growth will keep steel input prices lower, benefiting producers here. Coking coal and iron ore prices are expected to be down 22 per cent and nine per cent in 2012-13 as a result of the slowing Chinese demand and weakening in the rest of the world.