World commodities: Rally finds many takers

Year 2016 has begun on a strong note for most global commodities and many experts believe the worst is behind us. Reasons for the earlier fall in prices were threat of US Fed raising interest rates, slowing economic growth in China and over-supply, all of which have started to ease.

Andrew Cole, senior analyst - metals at Metal Bulletin Research says, "The worst is behind and reasons include widespread production cuts, broad-based stockpiling programmes in China, overextended speculative positioning on the short side, the vulnerability of the US dollar to further corrective weakness, a more stable oil price, and evidence of macro funds bottom-fishing commodities. Even charts have started to look more constructive. And the strength has been widespread, indicating a mood change."

Cole says that while 2015 was the year of capitulation, 2016 will ultimately be characterised as the year of base-building with a U or J shaped recovery.

Precious metals are not far behind. Rather, they have initiated the rally with international gold price up 19 per cent and silver up 12 per cent in 2016. The rally has little support from the biggest consumers like India and China where demand remains subdued. However, demand for physical gold improved, as reflected in the 26 per cent spurt in SPDR Gold Trust Gold Holdings in the last 10 weeks, the highest since September 2014.

Kunal Shah, head of commodities research, Nirmal Bang Commodities, says, "The theme for 2016 is emerging market led recovery and the worst is behind us in commodities. Prices will not retest their previous lows and a gradual recovery is underway. Interestingly, iron ore prices have rallied from $35 to $53 a tonne in spite of China's plan to cut steel production by 150 million tonnes in next three-five years. Things were not as bad as markets were projecting them to be."

"But in Q2 2016, precious metals will see slack demand. Prices have rallied by 20 per cent, so we can see some pullback. But, overall trend remains positive," adds Shah.

Unlike two months back when the spread between Brent and WTI crude oil had narrowed sharply, Brent is again at a premium with its price up 7.4 per cent in 2016. This is seen as a sign of stability even as some risk of Brent falling again remain. Thermal coal too is up 6.9 per cent after falling in previous three years. However, the outlook for crude oil and coal remains weak. Crude oil prices are still close to their multi-year lows and coal may also remain under pressure.

Deepak Kannan, managing editor- thermal coal, Platts said, "Oversupply is expected to persist this year amid limited supply cuts in Indonesia and Australia when they were expected to put sharp cuts. Thus, prices will see downward pressure this year too. Suppliers have not been cutting output due to lower oil prices while depreciation of local currencies versus dollar has provided a cushion to falling coal prices". Crude oil, too, is likely to see the oversupply situation persist.