Short-lived downswing?

It is rare that the prices of various groups of commodities have moved more or less in the same direction. But in a quite new phenomenon, the price trends in metals, agro-goods, energy and bullion seem to swing in tandem, though the extent of the swing varies.

The present commodities price scenario prima facie gives the impression that the bull run that saw prices to climb to record highs is behind us, and the new downturn may endure.

On the other hand, this may be a simplistic conclusion. For, a closer look at recent trends will indicate that they conform to the new price fluctuation pattern that has emerged as a result of increased investor participation in the commodities sector through futures exchanges.

Besides, commodities prices are now influenced by movements on the stock markets, as many of the players are common in both the bourses.

The new commodities price behaviour, as theorised by market watchers, is characterised broadly by three distinct phases. The first phase, where prices tend to shoot up, riding on a demand surge and higher investments, simultaneously witnesses a returns-driven drawdown on inventories.

This steers prices to the next phase, which is marked by considerable volatility as demand struggles to adjust to supply. However, this phase also normally spurs adjustments and corrections in inventories as well as output, guiding prices to the next phase "" which can be bearish or bullish, depending on economic growth prospects in the major economies.

Viewed from this angle, the current price volatility in commodities is not surprising. But what is baffling is the absence of readily assignable reasons for the uni-directional volatility.

Most analysts tend to attribute this to suddenly slack Chinese demand. And based on this single factor, they predict that the downturn will persist for a while, indicating a bad patch ahead for commodity investors and producers alike.

On the other side, there is an equally strong view that the Chinese factor is overblown. The logic here is simple. Even if the Chinese government succeeds in cooling the country's overheated economy, that will affect only incremental demand and not the basic demand itself, because the economy would still be growing.

Besides, there are some positive indications of resurgence in the global economy, as revealed by better growth numbers in the US, Japan and even Europe. Thus, the demand surge elsewhere may be adequate to offset wholly or largely any demand depression in China. This should logically help sustain commodity prices.

As far as the Indian commodities sector is concerned, it is no longer immune to global developments. However, the domestic market being substantial, local factors can force the prices of individual commodities to chalk out their own curve.

With the monsoon likely to be good and other economic indicators also generating optimism, there seems little reason why the commodities sector should remain bearish for long.