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."

India looks for wider Chinese market access to arrest falling farm exports

India is looking for greater access to the Chinese market as it seeks to arrest the fall in farm commodity exports.

After hitting a record of $43.2 billion in 2013-14, India's exports of agricultural produce began declining gradually due to lack of innovation and competitiveness and the sustained increase in minimum support prices (MSP). Consistently falling prices, changing preferences and domestic policies have also contributed to fall in major items such as buffalo meat, guar gum and oil meal. The silver lining is in seafood, which has had very good growth the past few years.

Both countries have discussed the issue of expanding bilateral trade at the informal meeting between Indian Prime Minister Narendra Modi and Chinese President Xi Jinping in Mamallapuram, Tamil Nadu.

The decline in exports, which began after FY14, has continued this fiscal. Between April and August 2019 alone, products registered with the government owned Agricultural & Processed Food Products Export Development Authority (Apeda) reported a decline of 16 per cent in dollar terms and a staggering 22 per cent drop in cereal exports. Apeda oversees half of India's overall farm exports. The total drop in exports does not seem that sharp due to sea food exports.

With Chinese president Xi Jinping's two-day visit, exporters are looking for a big boost to India's farm commodities, especially those impacted by the ongoing US-China trade war.

While China has already allowed its market access to many of India's farm commodities including rice and sugar, the country is looking at including many other products, especially marine and other items. India's Dhampur Sugar has signed a memorandum of understanding (MoU) with Chinese importers for shipment of 50,000 tonnes of sugar. Exports of certian products such as buffalo meat are routed through Vietnam, despite their having received formal approval for direct entry into China.

While China has already started importing limited quantities of rice from India, there is further potential of around $500 million worth of rice trade, according to experts. India's marine exports have had impressive growth, though, surging to $485 million in the first half of the current financial year from around $141 million in 2017-18.

"Now, we are talking about $1 billion worth of marine exports to China only. There is a huge demand for India's agricultural produce in China, but market access has been an issue which China should resolve. In the recent past, China has shown some interest to expand market access to India, which has been encouraging," said Ajay Sahai, Director General, Federation of Indian Export Organisation (FIEO).

Oil meal exporters have been the major losers the past few years, with importers cutting expenses on animal and bird feed. Cotton prices fell due to prolonged bearish phase in which China reduced cotton buying, while buffalo meat started losing ground after India's tough stand on abattoirs. The crude oil fall after FY15 has drastically cut guar gum demand.

"India's exports of agricultural commodities are declining for quite some time. Issues like access output, buffer stock and price decline are also impacting the country's farm produce. With land being limited and productivity going down, prices of agricultural commodities will only rise in the long run. Interestingly, India's agricultural exports have a lot to do with the purchasing power of consumers in importing countries. With most global economies facing problems, India's overall agricultural exports may suffer some short-term impact. But we are very bullish about the long term," said Sahai.

Meanwhile, independent experts have raised a red flag on India's competitiveness in the global agricultural produce market.

"Indian commodities would be able to find space in the international market only if they are quality- and price-competitive. By increasing minimum support price (MSP) without considering the ground reality of the international market, Indian produce has become outpriced. Hence, its exports of agricultural commodities have been declining steadily," said Vijay Sardana, an agricultural economist.

Another reason for the decline is lack of innovation. Since consumers in importing countries get substitute supplies from other countries at much better prices, they prefer to import from other regions, said Sardana.

Between the crop years 2013-14 and 2019-20, the government raised MSP of all farm commodities by 50-60 per cent.

Data compiled by the Food and Agricultural Organisation (FAO) of the United Nations have reported a sustained decline in the prices of global agricultural commodities due to bumper production.