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In spite of massive monetary easing and aggressive bond purchase programme by the US and Japan, commodities prices are under pressure. Bullions, agricultural commodities on CBOT, crude oil and base metals prices have ..

05 Apr 2013

By Kunal Shah
From the start of the year there were many forecasts about Chinese recovery, recovery in the United States, strong ETF and Investment demand for commodities and most importantly hype of commodities which we have seen since last four to five years.

In spite of massive monetary easing and aggressive bond purchase programme by the US and Japan, commodities prices are under pressure. Bullions, agricultural commodities on CBOT, crude oil and base metals prices have corrected sharply post February 2013 and are showing no signs of major recovery.

I believe investors have got one thing right after the massive infusion of liquidity by central bankers. Money has flown to equities as one thing was becoming clearer and clearer that after massive housing problems in China and rhetoric by government officials in China about curbing property prices by taking various measures commodities Bull Run will be unsustainable. massive investment demand during the year 2009, 2010 and 2011 will be missed for quite some time.

Chinese state agencies are under pressure and are not in a state to accumulate commodities aggressively like they did way back in 2009. Chinese banks have become cautious about funding against commodities in the year 2013. So on one hand world’s largest commodities consumer is showing clear signs of demand moderation and on the other hand miners continues to produce commodities. In many commodities like copper, silver and crude oil, there is record production. In many commodities, inventories are at their all-time highs especially aluminium. Crude oil whose stocks in the US are at a 20-year high.

A lot of commodities are still trading way above their long run cost and their marginal cost of production are encouraging producers to produce more. The demand growth has moderated in spite of recovery in the US. The money pumped in by the central bankers is not being parked in commodities during the year 2013, which is desirable for the global economy as it cannot absorb the shock of higher commodity prices.

In fact investors are booking profits on commodities investment, where for the first time we are seeing 6% redemption in Gold ETF’s. So, we are witnessing some serious outflows from precious metals ETFs.

Crude oil is one of the most liquid commodities. It was in a secular bull run and is also facing a serious threat from emergence of shale oil, shale gas and major gas discoveries in various parts of the world. Record production of crude oil and inventories at OECD countries is weighing on oil prices in spite of geopolitical tensions between North Korea, the US and South Korea. We have seen oil prices correcting from $97/barrel to $92/barrel.

Commodities after having some of the best years is likely to remain under pressure for the rest of 2013. Pull backs are expected from low levels but structural weakness in the complex will persist during the course of the year.


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