Commodities recover today on short-covering and hopes of stimulus

Metals, gold, and crude prices saw some short-covering and improvement in early trades on Monday in the international market. Improvement in copper, nickel, zinc was over 1 per cent while aluminium and lead were marginally higher. Brent crude oil also improved over 3 per cent to trade in futures around $51.3 per barrel. Gold, silver also recovered after Friday night’s long liquidation. On MCX too, most commodities were trading higher.

Short-covering of all beaten down commodities begun on late Friday as trade continued today and stimulus measures by China and other Asian nations also had its impact. However, "difficult to say if the worst is over," said T Gnanasekar, Director, CommTrendz Research.

He, however, says that the recovery seen now may not last long if virus spreads further. In that case what seems a temporary risk may cause a structural economic problem. "If the spread of the virus was restricted to China, then there was a possibility of a revival down the line. But, since the spread is increasing from country to country, it is likely to cause structural economic weakness." What may happen is, headed, "it looks like the central banks across the globe could act 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 decline between 7-17 per cent. Steel, iron ore are in no better shape. Following lower crude oil prices, chemicals, petrochemicals, and many agri commodity prices including palm oil have come under pressure.

China has been announcing stimulus packages since the trade was with the US started. This was to support industries. While trade war almost settled with a successful first round of talks, the problems have not ended. Sandeep Daga, Director, Regsus Consulting, said, "Slowdown due to Covid-19 is a harsh reality. Several countries have pulled down growth forecasts for Q1. Upcoming data could be bad.“

“The stimulus packages announced by many countries should provide a booster to the economy and financial markets in the next quarter. We would expect “hopes” of recovery to be stronger than the real recovery over next two quarters,” said Daga.

Natixis Commodity Research, division of London based investment bank Natixis has downgraded the outlook for all metals for this year. It said in the latest report that, "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 also said that, in case of aluminium production, there are procurement issues for both bauxite and caustic soda. As for copper, sulphuric acid production (which comes out as a by-product of mainstream copper production) has created logistical issues as the smelters are struggling to stock it. Hubei is the country's largest phosphate fertiliser producer, it consumes 20 per cent of the country's sulphuric acid production. Copper smelters are facing being unable to offload their acid and such will potentially need to reduce capacity utilization rate by 27 per cent, some are even reported to be exporting their acid production gratis."