 "Jeremy East, managing director Head, Metals Trading & Commodities, North East Asia & Greater China Financial Markets, Standard Chartered Bank")
While the global commodity markets are going through tough times, with low demand and oversupply, India is undergoing some interesting changes in terms of discussions on regulations and schemes to bring out unused gold from the households. Standard Chartered Bank, which has experience in commodities business more than 150 years ago and offers a variety of commodities including precious and base metals, a broad cross-section of energy products and many agricultural products, says that the global commodities is a cyclical market and we are probably “at or near the trough” in prices of commodities. Jeremy East, managing director Head, Metals Trading & Commodities, North East Asia & Greater China Financial Markets of Standard Chartered Bank speaks to T E Narasimhan & Gireesh Babu on the global commodity trends and Indian market. Edited excerpts:
Do you think metals and commodities, which have fallen significantly, have seen their worst or we could see further downside?
There are two sides of commodities; mining and energy production. Oil is probably in a slightly worse condition, but mining companies are definitely going through a process of closing down production. In the short term, both markets are still in over supply with significant above ground inventory.
It is a slightly different situation for gold. Production has started to decline and we are seeing production falling by around 3 or 4% this year and next year. Gold is a couple of years ahead of the general trend of commodities markets, in terms of supply, which is potentially more supportive to the price. We are anticipating steadier gold prices this year.
How do you see India handling gold market?
India's context is very interesting because this used to be the country where oil had an impact on gold. Back in 2012-13, India had to impose restrictions on gold import following huge import volumes — with gold second after oil in the import basket, it upset the balance of payments. Now with oil prices down from $100 to $30, everyone realises no matter what you do, India will always consume somewhere between 700 and 800 tonnes of gold or more.
Most of the gold comes from offshore. There is now a window of opportunity for the government to promote and create a domestic gold market and bring some of the existing stocks in India into circulation. It is a good time to do it now because it takes time to develop a domestic market and to get the basic infrastructure in place. It definitely appears that government is supportive of creating a domestic gold market for the industry and all these new initiatives that are coming on support this view. I can see the domestic Indian market succeeding the same way the China market did.
How do you see the iron ore market behaving, going forward?
Prices of iron ore has dropped significantly. Iron ore is a little bit similar to oil. The production of iron ore is still continuing at a fast pace. Recently, we have seen new iron ore producing mines in Australia coming on stream and exporting to China. Even when prices are down, production doesn’t seem to be declining. That potentially will have an impact on India where we see a big steel industry and iron ore industry.
From a financer's perspective, is Indian market a good bet now? Which are the sectors you are bullish?
My personal view, not the bank view, is that in India the mood is significantly more positive than it was over the previous years following the high level changes in the country. A lot of new initiatives, gold being one of them, have been introduced. This is sending a positive message to the outside world. I am excited about the gold market, because I have seen how the market developed in China, growing from a lower base to becoming a huge market it is today, and India has the same potential. India has good infrastructure in place but it doesn’t have a gold exchange, which China does.
One of the issues in India is that gold market is largely unregulated. There is no central point, whereas if you look at China, they have the gold exchange, and in London you have the LBMA (London Bullion Market Association).
One of the main reasons for commodity rout are said to be unwinding of carry trade globally and money flowing back to US. Do you think unwinding of carry trade is done for now or it will continue?
Interest rates everywhere look to be heading lower. I think the recent market turmoil and problems related to the volatility of the Chinese currency may cause the Fed to think carefully about interest rates adjustments, because there is quite a high expectation that they will be increasing the interest rates in March. In the last six weeks we have seen incredible volatility in the market. I am sure the Fed is watching it very closely. For many other countries we are seeing lower interest rates, China especially. I think it would continue.
What is your overall outlook for commodity markets?
What we are seeing right across commodities now is an oversupply and lower demand. Commodities is a cyclical market and we are probably “at or near the trough in prices of commodities. Supply doesn’t drop that quickly because. it takes lot of time and money to shut a mine.
Mining companies need to be sure that commodities prices are low and will continue to be so before they would decide to close and they are going through this thought process currently.
Lots of mines will continue to close. The key factor now is demand. If China's economy grows at 6.5%, with India's and the US’ growth coming back, the first thing that the market needs to do is to run down the existing stock.
Once that demand picks up, then we start a new cycle. It is difficult to say when that is going to happen. Is it going to be next year or is it going to be 2020? It is hard to say.
