By Kunal Shah
Last week, the entire commodity pack traded weak on the back of significant negative news flow across the world. China, the top consumer of metals reported HSBC flash manufacturing PMI much lower than expectations, weak GDP data from US and a stronger dollar pressurized most of the international commodities including gold.
Emerging markets continue to have inflationary issues due weakening currencies resulting in higher oil prices. And high inflation would automatically hinder the growth of emerging nations. Although, the main concern in the marketstill remains the enduring debt worries in theEuro zone which is creating a paradoxical situation for the world economy. Recently, Euro zone giants like France, Germany and Italy gathered for emergency talks on a failure of German Bond auctionresulting into a new dangerous twist in the debt crisis.
Most of the European nations have already been downgraded by major credit rating agencies and now France is on the same track, however it is trying to retain its AAA credit rating which is also essential to the EU debt rescue fund. The non-stop cuts in the expected growth of the world and higher interest rates would further dampen the optimism in the global financial markets.
Even though the credit crisis is in the Euro zone, it is affecting investment and capital creation in the entire world. All this negative developments in the market is acting as a huge sentiment dampener leading to a free fall in the prices of commodities irrespective of their fundamentals.
Chinese nickel pig iron production has been reduced due to lower demand from stainless steel makers. Demand for the stainless steel is on the downtrend since August, coupled with tight credit conditions and lower refined nickel prices has resulted in cut down in output. I expect nickel prices to test around $16500 due to lower demand forecast and bearish outlook for stainless steel.
Lead has been the weakest metal since the start of the year compared to other metals as China has reduced the usage and production of lead-acid batteries due to environmental issues in the country. I expect prices to remain under pressure for the coming quarter.
On the other hand, we have seen a sharp rally in the oil prices supported by a drawn down in the stockpiles and fears of geo-political tensions persisting in Iran. I feel in such uncertain market the current price of oil is not sustainable as the lower growth across the globe would dampen the oil demand and will result in the pilling up of the stocks at various exchanges.
I feel that based on the fragile economicscenario, the outlook for metals still remains grim and I suggest one should sell on every rally. Precious metals are expected to remain under pressure due to the concerns over the credit crunch across the globe.
(The author is Head-Commodities Research at Nirmal Bang Commodities Pvt Ltd. Mr Shah is a regular contributor to Commodity Online)
