Crash in commodities market may be temporary

© Copyright 2000 - 2009 The Hindu Business Line

M.R. Subramani Chennai, March 23

Last week, the commodities market witnessed its steepest weekly fall in the last five decades. Gold fell eight per cent, crude dropped 6.35 per cent and wheat prices in the US market slipped below the psychological mark of $10 a bushel. Most of the commodities that peaked late last month or early this month have come off with soft ones such as soyabean, wheat and crude palm oil slipping by over 20 per cent.

Does the fall signify the end of commodities boom? Not really, say analysts and experts. The trend actually is a fallout of the crash in equity markets. Funds are booking their profits in commodities so that they will have the necessary liquidity and can overcome any loss in equities, says Mr V. Shanmugham, Chief Economist of the Multi Commodity Exchange.

A shake-out

“It is also more of a long overdue correction,” he says. “The sell-out in the commodities is to add liquidity and this is seen as a shake-out. This will eliminate small players in the market, who would be forced to de-hedge their positions,” says Mr Shyamal Gupta, Head (Institutional Business) of Kotak Commodity Services Ltd. Analysts see the current phase as a temporary one where the commodities could see a fall for the time being, consolidate, and then rebound.

“What we are witnessing is a new orbital in commodities. The prices will recover and the players are likely to take them to a new level,” said Mr Gupta.

Recession fears

“Currently, fears of recession gripping the US are mainly driving crude lower. As a result, other commodities such as soyabean, crude palm oil and corn – all seen as alternative sources of crude oil – have crashed. Vegetable oils had found new peak levels as they were diverted for bio-fuels. Diversion of acreage to crops such as corn, besides the vagaries of weather, saw the wheat counter on boil.

“In between, fears of inflation and economic slowdown have seen the funds and players buy into gold. “Physical buying will have to be at higher levels after the markets rebound from this fall. Soft commodities will touch new highs,” said Mr Gupta. “Gold, on the other hand, belongs to asset class. Its glitter will remain and demand growth will keep crude firm,” he says. Increasing demand, especially from emerging nations, is seen driving the prices of commodities further up.

And Mr Gupta sums up the likely trend saying: “Commodities is the only avenue for funds to make money for sometime to come.”