The Hindu Business Line : Panic sell-off across commodities futures market

Mumbai, July 12 Panic has gripped the commodity futures market, resulting in a hefty sell-off. Long liquidation and rapidly declining prices now define most futures transactions on the bourses. Prices of major commodities covering energy products, base metals and agriculture are down from a week ago.

In one short week, there has been a dramatic change of sentiment following which many markets have moved sharply down, much to the consternation of market participants.

At close to $60 a barrel, crude has lost 12-13 per cent in value in the last few days. Other energy products have fared equally badly. Base metals, aluminium, copper, nickel, lead, tin and zinc have lost between 6 per cent and 9 per cent of the value. Wheat, corn and cotton prices are down too, while soyabean has taken a beating with price fall of nearly 14 per cent.

What has led to this sudden sell-off when the markets were actually looking forward to further recovery? Indeed, a combination of factors has taken its toll, with the collapse of confidence in the strength of economic recovery the prime mover. Flow of negative data (especially the recent negative US jobs data) has renewed concerns over sustained economic growth.

But, that’s not all. There are also regulatory developments in the US making market participants nervous. The commodity futures market regulator CFTC is investigating the role of speculators in the crude oil market. There is suspicion that speculators are pushing up crude prices.

There is reason to believe, CFTC may review position limits and hedge exemptions over the next few months. In the event, there exists the possibility of restraints being imposed on participants in the derivatives market. In apprehension, there has been a liquidation of position, resulting in a rapid fall in prices.

When we look at the physical side of crude, the market fundamentals have actually turned constructive for a price movement upwards. Inventory overhang has eased, demand is still weak but has surely stabilised from levels three months ago and supply cuts are still in place. Asian demand is robust.

China factor

As for base metals, the China factor which allowed a big price rise in the complex is beginning to wane. The Asian metals giant may have completed its restocking programme through the State Reserve Bureau. On the other hand, OECD demand, which traditionally is the market driver, does not betray strong signs of revival. Inventory levels at the exchanges are rising.

As for precious metals, prices have declined to recent lows following heavy liquidation and broad risk reduction. This has been caused by a stronger-than-expected US dollar which has led to sell-off in gold. The US dollar continues to be the key driver for the bullion market as gold and silver prices are negatively correlated with the greenback.

Physical demand too is seen suffering. Recent hike in customs duty in India is perceived as negative. Delayed monsoon and its consequent impact on rural incomes and hence demand in India (worlds largest consumer) are also negative. Yet, gold prices have limited downside potential from the current levels (physical demand may emerge), but silver is vulnerable because of weak fundamentals.

Weather conditions

With weather conditions in the US and elsewhere (except India) looking supportive, prospects for major crops during the upcoming harvest in September /October appear satisfactory. Stronger dollar, benign weather and risk reduction are currently driving agricultural futures.

It may be important to remember that July and August are treacherous months for agriculture. Weather developments need to be watched closely. Recent fall in agricultural commodity prices may be reversed if monsoon conditions in India worsen. In the event, grains, oilseeds, cotton and sugar prices may change direction in the hope of emerging large-scale demand from India.

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