October 5, 2022


Enduring Values

Commodities drop on recession fears: Why this could be good news for India

Fears of structurally high inflation could recede in India due to the recent decline in commodity prices, following recession fears in developed economies, a strong dollar index and rising interest rates globally.
Recession fears in the US and Europe had only hammered global equities earlier but have now begun to creep into commodities too as prices of metals such as copper, aluminium and zinc that shot to record levels after the outbreak of the Russia-Ukraine conflict have dropped considerably.
The Bloomberg Commodity Spot Index, which tracks 23 energy, metal and crop futures contracts, has lost more than 20% after touching the record in June as recession fears ravage what was one of the most resilient corners of the market.
Similarly, the LME Metal index, which encompasses six variants, was at 3,696. 80 on July 5 versus 5,060. 60 in the third week of April, recording a plunge of about 27%, showed data compiled by ETIG.
Copper prices have cracked 20% from recent highs. “Copper prices trend with economic growth and inflation. That’s why Copper is also called Dr. Copper in macroeconomic parlance. It signals the strength of aggregate demand in the economy. Historically, weaker copper prices have coincided with downward trend in inflation. Even market driven inflation expectations are falling along with copper,” noted brokerage DSP in a research report.
And not just copper, most industrial metals have seen a sharp correction highlighting the slowing down of economic growth, which is most pronounced in three biggest economic blocs – US, EU and China. Key industrial metals like
Copper (-20%), Aluminum (-37%) and soft commodities like Wheat (-20%) which are closely linked to inflationary trends have faced price erosion, noted DSP.
Brent crude oil has been falling in the past few days amid concerns of a recession but it is yet to witness a meaningful decline. It is hovering about 10% lower from recent highs.
Brent crude futures dropped to $98.5/barrel on Wednesday, falling below $100/barrel for the first time since April 25, as recession fears in the west fuelled a broader selloff.
Even copper and lead prices have fallen to a 52-week low. Cotton futures at the Intercontinental Exchange hit a 25-week low of $1.13 per pound last week.
Gold, which had topped $1,800 again late last week, fell to $1,755 an ounce, while steel slipped to a nine-month low of 4,242 Chinese yuan a tonne.
Prices for everything from gasoline to wheat are slumping on concerns that a stagnating economy will hurt demand. Though commodity supplies remain tight, the retreat could provide much-needed relief to consumers struggling with surging inflation.
Commodities had been advancing since the early days of the worldwide pandemic as massive government spending and ultra-low interest rates bolstered demand while production was curbed. Russia’s war in Ukraine exacerbated supply disruptions.
But sentiment has shifted as fears grow that the Federal Reserve won’t be able to tame the highest inflation in four decades without throwing the economy into a recession. A surge in the U.S. dollar — which makes it more expensive to buy raw materials priced in the greenback — has also weighed on U.S.-traded commodities. Hedge-fund managers recently slashed bets on higher commodity prices to the lowest in almost two years.
“On an average, Energy, Base Metals, Precious Metals and Agricultural prices are now down 25% from 52 week highs as markets are anticipating a global slowdown morphing into a full blown global recession,” noted SBI in a research report.
Samiran Chakraborty, managing director and top economist for India at Citigroup, stated in an interview with Bloomberg Television on Monday that “India being a net importer of commodities should gain on the inflation front.”
With prices of base metals falling, user industries like white goods and automobiles, would now be in a position to cut their input costs and improve margins.
Even prices of major edible oils have slumped in the global markets since June. Between June 1 and July 1, the landed price of crude palm oil has dropped by almost 24 per cent, while soybean and sunflower oil dropped by 17.4 and 12.2 per cent, respectively. The fall in edible oil prices has primarily been driven by Indonesia lifting its ban on export of palm oil. India imports more than 60 per cent of its edible oil requirement.
According to government statistics, since the beginning of this month, the average retail prices of packaged edible oils have decreased marginally nationwide, with the exception of groundnut oil, which are ranging between Rs 150 and 190 per kg.
The Reserve Bank of India (RBI) may not need to revise upward its inflation forecast for FY23 due to the softening of global prices of crude oil and industrial metals.
Lower commodity prices, particularly of crude oil, should reduce risks of imported inflation for India. Citigroup recently cautioned that crude prices might touch $65 a barrel by the end of this year in case recession hits and cripples demand in advanced economies.
This could cushion the negative impact on the rupee, which is being pummelled over concerns of a record high trade deficit and continued withdrawal of foreign portfolio investors from India’s financial markets.
“If oil prices sustain at the lower level, say around $100 per barrel, it erases the need for upward revision of inflation by the Monetary Policy Committee,” said Madan Sabnavis, chief economist, Bank of Baroda. “Other commodity prices have already started softening since May. If the (softening) trend extends, it should help narrow the trade deficit, a key concern that weighs on the rupee’s value against the dollar. ”
The rupee gained 0. 09% to close at 79. 30 to a dollar Wednesday. It was the fourth-best performing Asian currency during the day, showed Bloomberg data compiled by ETIG. It hit a lifetime low of 79. 38/$ on Tuesday.
“If oil prices remain softer, we are unlikely to see any upward revision of inflation prices,” said Rahul Bajoria, India economist at Barclays. “The monsoons will play a key role here, influencing food prices along with crude oil. We need to see how overall commodity prices are shaping up in the coming weeks, helping the trade deficit to narrow. ”
According to rating agency Crisil, a fall in the benchmark Brent price will have a positive impact on India in terms of a reduction of overall inflationary pressure.
India imports 85% of its crude requirements. The third largest oil consumer of the world imported 212 million tonne (MT) crude oil in 2021-22 for $ 120 billion.
Lower oil prices should also help bridge the trade gap. “Any reduction of the trade deficit will work well, arresting any sudden loss of the rupee’s value to the dollar,” he said.
Additionally, RBI has also announced a slew of measures to augment capital inflows by making NRI deposits more attractive.
India’s trade deficit, or excess of imports over exports, swelled to a record $25.63 billion in June, driven by imports of petroleum, coal and gold.
Meanwhile, economic activity has shown an uptick in June 2022. The PHDCCI Economy GPS Index, which captures the momentum in supply side business activity through growth in GST collections, demand side consumer behaviour through volume growth in passenger vehicle sales and sensitivity of policy reforms and impact of domestic and international economic and business environment through the movement of SENSEX at the base year of 2018-19=100, for June 2022 has increased to 136.6 as compared to 128.0 in May 2022/
Passenger vehicles growth has recorded a sequential growth of 27.7% while gross GST collections in June 2022 increased to Rs. 1,44,616 crore and has recorded a sequential growth of 2.6% in June 2022 as compared to Rs. 1,40,885 crore in May 2022.
According to an analysis by SBI, sectors like Pharmaceuticals and new age sectors like Healthcare did witness holding on to higher working capital utilisation limits.”We expect sectors such as Infrastructure including Power, Renewable Energy, Petroleum, Mining Road, NBFCs, Cement, Aviation, Electric Vehicles, Electron- ics, Commercial Real Estate, Food Processing etc will drive credit growth in coming quarters,” said Dr. Soumya Kanti Ghosh, Group Chief Economic Adviser at State Bank of India.
India’s services activity too expanded at the fastest pace in eleven years in June 2022. Rising from 58.9 in May to 59.2 in June, the seasonally adjusted S&P Global India Services PMI Business Activity Index was at its highest mark since April 2011.
With inputs from Agencies