Commodity Roundup

March was a mixed month for commodity prices. Oil prices eased after briefly spiking, as jitters over Ukraine-Russia geopolitical tensions subsided. Gold ended the month in red, reversing initial gains after the Fed’s FOMC policy decision, with the spot pr ice slipping below the USD 1,300/oz-mark.


Most of the industrial metals declined in March, led by Copper (-4.9%) as concerns over China’s economic growth weighed on the demand outlook. However, alumin ium prices stabilized and spot premia remain at elevated levels amid delays in securing delivery of the metal from LME-warehouses.


Meanwhile, most agricultural commodities gained as weather-related disruptions weighed on the supply outlook. Sugar ended the month up by 8% amid supply concerns following the drought in Brazil.


Market Summary

Energy: Crude oil

Crude oil prices rose initially in March as Russia- Ukraine tensions raised concerns over supply of natural gas to Europe, thereby spurring a rally in energy commodity-peers

Review of March: Prices fell as markets assured of adequate gas supply

Crude oil prices rose initially in March as Russia-Ukraine tensions raised concerns over supply of natural gas to Europe, ther eby spurring a rally in energy commodity- peers. However oil prices have eased sinc e then as markets factored in adequate alternative sources of supply of gas for Europe. Besides, extreme cold weather in northern hemisphere has begun to recede, further aiding the fall in energy prices. Consequently Brent oil pric e eased from ~USD 111/bbl in early-March to USD 106/bbl by mid-month


However, prices have corrected lower since then

Oil prices have again risen in the last week as new political risks emerge

Disruptions to oil supply from Nigeria and Libya, have off-late, provided some support to crude oil prices. Royal Dutch Shell declared force majeure on Nigeria's Forcados crude exports last week, due to a pipeline leak. A large oilfield in Libya was shut earlier in the week, which is likely to red uce Libya’s oil output by ~80,000 barrels per day (bpd) to ~150,000 bpd. Brent is curre ntly hovering around USD 108/bbl.

Oil demand outlook continues to improve amid signs of economic recovery in US and Europe.
However, China growth concerns to limit the optimism

Oil demand outlook continues to improve

Two out of three major international agenci es which forecast oi l market conditions revised upwards their projec tions for oil demand growth in 2014. The International Energy Agency (IEA), in its March report , increased its forecast for 2014 global oil demand growth by 50,000 bpd to 1.35 million bpd. Similarly, the OPEC too raised its oil demand growth fo recast to 1.14 mbpd (+50,000 bpd over the previo us report), citing improved economic outlook over US and Europe.

Nevertheless, supply is still slated to outpace demand

However, supply situation continues to remain comfortableAs discussed in previous reports, the IEA ex pects total non-OPEC crude oil supplies to increase by 1.7 mbpd in 2014, adding to a 1.3 mbpd increase last year, which alone would exceed the rise in total world demand.

Meanwhile, output from OPEC countries (esp. Iraq) is also slated to rise, most likely creating a situation of excess oil supply. Iraq begun production at the giant West Qurna-2 field, moving closer to its target of achieving 4 mbpd oil production rate in 2014. The IEA said that Iraq produced average 3.6 mbpd oi l in February, the highest since 1979, entrenching its position as the second-largest OPEC producer. However, overall OPEC output rose only modestly in February as gains in Iraq were offset by lower production in Libya.

Prices likely to trade with a bearish bias as jitters around Russia-Ukraine geopolitics seem to have subsided Speculators have also pared bullish positions on crude oil

Outlook: Oil prices likely to trade with a bearish bias

As in our February roundup, we continue to maintain a bearish bias for oil prices and see scope for further decline in oil prices given rising oil supply (esp. from non-OPEC countries like US and Canada). While growth improvement is expected in most developed economies (led by US), an expected slowdown in China is likely to limit the rise in oil demand.

 Market seems to have recovered from jitters surrounding Ukraine-Russia tensions as CFTC data showed that traders cut bullish bets on oil prices. Moreover, prices might face further headwinds as severe winter in Northern hemisphere recedes. The Brent crude oil price is expected to hover lowe r at around USD 104-106/bbl by June 2014.


Gold prices ended the month down by ~4%

Precious Metal: Gold

March was a mixed month for gold prices. Af ter rallying to as high as USD 1,390/oz levels earlier in the month, prices pared gains post the Fed’s FOMC policy decision, slipping below the USD 1,300/oz-mark. Gold is currently hovering around the USD 1,290/oz levels and ended the month down by ~4%.

ETF holdings recorded the second consecutive month of increase

Firm safe-haven demand supported prices

The metal continued to witness firm safe-h aven demand this month as global risk sentiment remained on a cautious footing, ahead of the Fed’s FOMC policy decision (announced in the second-half of the mont h). Further, escalating Ukraine-Russia tensions and concerns over a possible slowdown in China aided the metal’s safe- haven demand.

Meanwhile, investment demand also remain ed strong. Total kn own gold-backed ETF holdings witnessed a net accretion for the second consecutive month, rising by 19 metric tonnes.

Fed’s decision to further taper pace of QE weighed on prices

Fed’s decision to further reduce pace of QE limited upside

However, prices came under pressure in the latter half of the month after the Fed announced a further reduction of USD 10 bn/m onth in its pace of asset purchases. Also, comments by Fed Chairperson Yellen suggested that interest rates in US would rise earlier than previously expected. This has fuelled concerns that the period of easy liquidity will end sooner than anticipated. Go ld prices recorded a single-session loss of 1.9% post the FOMC policy announcement.

We expect gold prices to trade with a bearish bias in 2014; our year-end price call is USD 1200/oz

Price outlook 2014: Gold prices to trade with a bearish bias

Gold has enjoyed substantial gains this year in comparison to last year’s 32% decline. Prices are up 7% YTD. As we pointed out in our report last month, gold appears to be regaining its safe-haven status. However, with the Fed continuing to taper QE gradually and the Dollar likely to strengthen in the medium term, gold prices are likely to come under pressure.

Meanwhile, it is to be seen whether India’s gold import curbs would be repealed anytime soon, given the significant improv ement in the nation’s current account balance. Also, there are concerns that India’ s gold imports throug h unofficial channels have increased over the course of last ye ar. Any move towards relaxing the curbs is likely to pose upside risks to prices.

On the whole, we expect gold prices to trade with a bearish bias at around USD 1200/oz by end-2014.


Industrial metal: Aluminium

Aluminium prices fell in the first three months of 2014 amid ample supply and reported overcapacity in aluminium smelting industry

LME prices fell in Q1’2014

The benchmark 3-month LME aluminium price fell 2.3% in the first three months of 2014. January saw a steep fall of 5.2% amid ample global supply of the metal. However, prices have recovered slightly since then on the back of optimism over US- led global economic recovery. Nevertheless, the aluminium price is currently hovering around USD 1758 per metric tonne (MT), lo wer than USD 1800/MT seen at end-2013.

However, premia for physical delivery of aluminium continue to rise amid lengthy queues at LME-warehouses for taking delivery

However, spot premia rose in Q1’2014

Despite falling LME prices, the premia for physical delivery of the metal have continued to rise in 2014. The rise in premia become all the more surprising given that global inventories of aluminium are adequate and the aluminium-smelting industry is considered to suffer from overcapacity with many big firms trimming operations. Part of the rise in premia could be explained by improvement in economic outlook (esp. US) which raised the physical demand for aluminium.

However, the major reason behind the rise in spot premia seems to be the recent rise in cancellation of LME aluminium warrants ( refer to chart below ). Apparently, owners of aluminium (stored at warehouses) have canc elled warrants (i.e. withdrawn from the market to sell aluminium) and instead entered into financing deals tied to the metal. Consequently, the physical supply of the metal has reduced, despite bloated inventories lying in warehouses. Consequent ly, it became more costly for aluminium consumers to obtain the metal. Hence, spot premia rose sharply in January period and has remained elevated since then.

While LME has been long grappling with the issue of warehouse-queues, market clamour has increased for a new “all- in” aluminium contract

LME strives to shorted warehousing delays to check rising premia

The rise in premia has raised costs for co nsumers of aluminium an d has eroded a part of their gains from the subdued LME benchmar k prices. Taking cognisance, the London Metal Exchange (LME) intends to take more measures to shorten the “queues” for taking aluminium delivery out of LME-a ffiliated warehouses. Meanwhile, consumers (industries which use aluminium as raw materi al) in US have increa singly called for the introduction of a new “all-in” contract for aluminium (which would negate the risk emanating from movement in physical premium). Increasingly, market talk indicates that the CME Group in US might introduce a new “all-in” aluminium contract later in the year.

luminium prices and premia are likely to trade with a bearish bias as global inventories in warehouses as yet remain bloated and as largest consumer, China, faces growth slowdown

Outlook: Both aluminium price and premia likely to ease going aheadAluminium prices and premia are likely to face headwinds owing to two reasons – (1) global inventories in warehouses as yet remain bloated (~2.2 mn metric tonnes, around 17 days of cover) and (2) growth slowdown in largest consumer, China. Consequently, aluminium prices are likely to trade with a bearish bias in the near-term. Further clarity on industrial metal price-outlook will emerge going ahead and would depend on the growth outlook for US and China.


The benchmark sugar price ended the month up by 8%

Agricultural commodity: Sugar

March was a volatile month for sugar pric es. The international benchmark sugar price spiked to over a four-month high of 18.3 cent s/lb as the drought in Brazil raised supply concerns. However, in the second-half of the month, sugar prices pared gains amid signs of robust supply from other exporters. Prices ended the month at ~17.8 cents/lb (+8%).


Sugar prices touched a four-month high on supply concerns following the drought in Brazil

Drought in Brazil stoked supply concerns...

The severe drought in Brazil’s South Centra l region—a major sugarcane growing area, raised concerns over sugar output in the world’s largest exporter. Industry body UNICA estimated that nearly 35-40 mn tonnes of sugarcane might have been damaged, thereby sparking a rally in prices. However, its impact on the 2014-15 market year is likely to be limited as most mill owners ha ve sufficient opening stocks of sugarcane left-over from the previous year’s strong harvest.

Sugar prices to trade with bearish bias in 2014 amid comfortable supply situation

Diversion of cane towards ethanol production a cause for concern

...but, global supply glut likely to persist

Prospects for global sugar supply remain upbeat. In Thailand, the world’s second largest exporter, sugar output is up 29% in the current crushing season (that began November-end). Even in Brazil, where the crushi ng season has just started, output is up ~1% YoY. Further, recent rainfall in Brazil is expected to reduce the extent of crop damage. Meanwhile, in India, the world’s second-largest producer, raw sugar production in the ongoing crus hing season (October-March) is proceeding at a firm pace despite a delayed start to cane-crushing. Also, rising Indian exports are likely to limit the upside in international prices. On the whole, the recent rally in prices is expected to be short-lived and prices are likely to trade with a bearish bias in 2014 . However, there are some upside risks. First, recent data from Brazil’s UNICA showed that more cane is being diverted towards ethanol production on account of attractive prices. This threatens to lower world sugar output. Second, there’s a risk of an El Nino effect, which would cause weathe r disruptions and likely crop damage in parts of Asia and South America.

ndia’s raw sugar exports picked up this season after the Government announced an export subsidy A

India: Sugar exports pick up on sops offered to industry

The stand-off between sugar mill owners and the Government ended last month after the Cabinet Committee on Economic Affairs (CCEA) approved sops for the industry. An export subsidy of INR 3,333/tonne has been offered on raw sugar till April 2014 along with interest subvention for loans taken by mill owners. A total of 4 mn tonnes has been allowed for exports over two market years, including the current season (October- September). Raw sugar exports between October-February rose to 6 lakh tonnes vs. a paltry 3,000 tonnes last year. Meanwhile, th e Indian Sugar Mills Association (ISMA) revised downwards its 2013-14 sugar output by 5% to 23.8 mn tonnes. However, supply is likely to remain comfortable as opening stocks this season were the highest since 2006.