Rebound short-lived? Recovery in commodity prices likely to be a blip

Metals, gold, and crude out prices saw some short-covering and an improvement in early trades in the international market on Monday. The prices of nickel and lead were up over 1 per cent; copper, aluminium, and zinc improved, too.

Brent crude oil jumped over 3 per cent in early futures trade to around $51.3 per barrel, but later gave up some of the gains. Gold and silver, too, recovered. On the MCX, most commodities were trading higher.

The short covering of all beaten-down commodities —which started late on Friday -- continued. Stimulus measures by China and other Asian nations helped in recovery. However, “it’s difficult to say the worst is over,” said T Gnanasekar, director, CommTrendz Research.

He said the recovery may be short-lived because of the rapidly spreading coronavirus. In that case what seems a temporary risk may cause a structural economic problem. “If the spread of the virus was restricted to China, there was a possibility of a revival down the line. But, since it is spreading to multiple countries, the outbreak is likely to cause structural economic weakness.” What may happen is, Gnanaseka said, “central banks across the globe acting together by cutting rates and giving more stimulus packages”.

Since the outbreak of coronavirus in China, metal and crude oil prices have seen a sharp fall between 7 per cent and 17 per cent. Steel and iron ore are in no better shape. Chemical, petrochemical, and many agri-commodity prices, including palm oil, too, have come under pressure.

China has been announcing stimulus packages since the trade war between it and the US started. These were to support its industries. While the trade war almost settled with a phase one deal, the problems have not ended. Sandeep Daga, director, Regsus Consulting, said: “Coronavirus-related slowdown is a harsh reality. Several countries have pulled down growth forecasts for Q1. Upcoming data could be bad.”

What about stimulus packages announced by many countries? “That should provide a booster to the economy and the markets in the next quarter. We sincerely doubt that the patient can be released from the hospital,” said Daga.

Natixis Commodity Research, a division of London-based investment bank Natixis, has downgraded the outlook for all metals for this year. It, in its latest report, said: “China produces and consumes 56 per cent of the world's aluminium; it also produces 38 per cent of the world's refined copper and consumes 52 per cent of it”. 

Natixis said in the case of aluminium production, there are procurement issues regarding both bauxite and caustic soda. As for copper, sulphuric acid production (which comes out as a byproduct of the mainstream copper production) has created logistical issues as smelters are struggling to stock it. Hubei, the epicentre of the outbreak, is China’s largest phosphate fertiliser producer — it consumes 20 per cent of the country's sulphuric acid production.

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