With global markets in turmoil following the Merrill Lynch sellout and Lehman Brothers’ bankruptcy, all asset classes, including commodities, are witnessing selling pressure. This is because fund managers globally are trying to exploit all opportunities to generate cash.
Although some selling pressure has been seen in commodities since last few weeks, it is expected to continue till the dust settles down. According to Commtrendz Research Director T. Gnansekar, “most funds are now trying to generate cash from wherever available and commodities are not spared.”
Gnansekar said, “How far commodities prices will fall is a matter of guess, but I don’t think there is room for more than 10-15 per cent fall in general.” In the last three days alone, copper for delivery in three months slid as much as $210, or 3 per cent, to $6,720 a metric tonne on the London Metal Exchange.
That is the lowest intra-day price since January 22. It last traded at $6,784 a tonne. Among other metals on the exchange, aluminum traded at $2,525 a tonne, the lowest compared with intra-day prices since January 29. Tin slumped by $700, or 3.7 per cent, to $18,200 a tonne, while lead dropped by $60, or 3.2 per cent, to $1,790 and nickel fell by $454, or 2.5 per cent, to $17,651.
Even crude oil, which was selling at $100 per barrel only three days ago, on Tuesday fell below $92. “Commodity prices are expected to remain under pressure for some time, but it is a good sign as inflation will come under control,” said Nilesh Shah, Deputy MD, ICICI Pru AMC.
If global prices come down, surely domestic commodity futures will reflect them. Comexes seem to be prepared for this. “We are closely watching the global situation, but we have not come across any payment problems so far. Our value at risk (VAR) margin system is in place and with the increase in volatility, margin requirement also goes up,” said MCX Managing Director Joseph Messy.
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Gnansekar said, “It will be interesting to watch the scene as many funds have been booking profit in commodities for the last 45 days. They are sitting on cash and once they come and invest in the market, commodities may see trend reversal.”
Gnansekar is of the view that there will be reallocation of funds in various asset classes and part of it will come to commodities, but their re-entry will be with a vengeance. He expects that to happen in early October. But till then, should Indian traders go short? “Beware! The rupee is falling and, hence, a fall in global commodities prices may not be reflected exactly in commodities traded on Indian exchanges,” he cautioned.