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With the Chinese economic slowdown depressing commodity prices globally, India could emerge as a gainer. Considering the country’s determination to keep the rupee exchange rate under check, the downward bias of commodities prices will work in favour of India, which is dependent on imports for metals and crude oil, according to analysts.
China’s economy grew 7.6 per cent in the second quarter of 2012 from a year earlier, its slowest pace in three years, confirming fears of a downward trajectory. This has significance for global commodity prices as China accounts for roughly 40 per cent of the global demand for raw materials.
Following lower Chinese growth month after month, commodities prices in international markets are falling. Since April, most metals are down six to 19 per cent. While slowing Chinese demand is one reason, strengthening of the US currency has also resulted in lower prices.
While India is import-dependent for metals, falling prices of iron ore would help its steel making industry. Besides, Indian iron ore companies usually keep prices at competitive levels against the cost of imports.
However, Indian consumers were not benefiting from lower prices as the cost of imports remained high due to a weak rupee. This may change soon.
“With the recent measures to check the rupee exchange rates, it seems that the currency has bottomed out. With commodities likely to trade with a downward bias globally, India Inc can look for lower cost of raw materials,” said HDFC Bank Chief Economist Abheek Barua.
On Monday, the Reserve Bank of India announced measures to tighten liquidity in the domestic market to make dollar borrowing cheaper with an intention to reverse the rupee’s slide.
“Most industrial raw materials are likely to trade lower in the coming months as supply overhang has been there, mostly due to the slowdown in China and the overall slower economic activities in emerging countries,” said Gnanasekar Thiagarajan, director, Commtrendz Research. “The dollar is also likely to remain strong, which will keep downward pressure on commodities.”
The stock data of metals on the London Metal Exchange is an indicator of rising supplies (see table).
In the past, China had come out with stimulus measures in time of slowdown, which is missing now as Chinese authorities believe slowdown could be used to streamline the banking and financial markets, said Thiagarajan.
Barua has a point that the commodities market could get some respite from the fact that the US has started showing signs of growth and that the Euro zone is also bottoming out. However, he believes these all are not enough to compensate China’s fall in demand.
China’s slowdown is here to stay for a while. Nomura International said in a research note: “We maintain our GDP (gross domestic product) growth forecast for 2013 at 7.5 per cent year-on-year, but lower our forecast for 2014 GDP growth to 6.9 per cent, from 7.5 per cent. We expect growth to bottom out in Q2 2014 at 6.5 per cent.”
While most metals and raw materials may remain lower, crude oil is a different game. Recently, crude oil prices have strengthened premiums given for geopolitical developments. In other words, oil could be a spoilsport.
“The recent comments from the US Fed, together with the geopolitical risk premium in the Middle East, thanks to Egypt, have given a strong support to Brent. And with the spreads with WTI (West Texas Intermediate) narrowing, we should see demand for Brent crude oil from West Africa and North Sea increasing, which will further help to support Brent prices and thereby could increase India’s import prices,” said Abhishek Deshpande, oil markets analyst with London-based Natixis Commodities Research.
