Weekly Wrap – Monsoon and gold keep commodities sentiments bullish

In March this year, the world entered the COVID-19 pandemic with persistent, pre-existing external imbalances. The crisis has caused a sharp reduction in trade and significant movements in exchange rates, but limited reduction in global current account deficits and surpluses.

The outlook remains highly uncertain as the risks of new waves of the contagion, capital flow reversals, and a further decline in global trade still loom large on the horizon.

According to the International Monetary Fund (IMF), the immediate policy priorities are to provide critical relief and promote economic recovery. Once the pandemic abates, reducing the world’s external imbalances will require collective reform efforts by both excess surplus and deficit countries. New trade barriers will not be effective in reducing imbalances.

But there i some good news in India, where strong monsoon and rising gold prices are keeping the commodities sectors chugging along well.

Agriculture

While monsoon in India is on track, showering bountiful of rains all across the country, the floods in northeastern Assam is a worrying. This will have an impact on both paddy and tea this year. But kharif season sowing has been more than inadequate, and India is poised to harvest another bumper crop.

On the back of an unprecedented crisis led by the coronavirus pandemic, the government’s special scheme to provide free food grains to about 81 crore Indians under the National Food Security Act (NFSA) is in full swing. The beneficiaries of these schemes are covered under Antyodaya Anna Yojana (AAY) and Priority Householders (PHH).

The government has pledged to provide 5 kg rice or wheat and 1 kg chana, over and above the regular monthly entitlements. During this period, Prime Minister’s Garib Kalyan Anna Yojana’ is successfully reaching the doorsteps of the weaker sections of society.

While the states have lifted about 118 lakh tonnes (99 per cent) food grains from the Food Corporation of India’s (FCI) depots or the central pool, they have distributed over 111.52 lakh tonnes (93.5 per cent) of allocated food grains during April-June 2020, according to the FCI.

Metals

The Chinese steel sector is expected to face oversupply of 80 million tonnes capacity in 2020. New steel capacity released in a relatively short time will have a great impact on the market, especially as the COVID-19 epidemic crimped demand in both domestic and foreign markets.

The steel industry is likely to witness a serious oversupply situation again. High inventories may become the norm in the steel market this year. At the same time, high inventories will cause fund erosions and impact total turnover.

Crude steel production is likely to cross 1 billion tonnes this year in China, and steel production is likely to account for over 56 percent of the global output this year. According to data released by the National Development and Reform Commission, China produced 499 million tonnnes of crude steel during the first six months of this year, up 1.4 percent on a yearly basis.

Meanwhile, US president Donald Trump has reimposed US tariffs on imports of Canadian aluminium. The Trump administration placed 10% tariffs on primary aluminium imports, along with 25% tariffs on steel imports.

In India, the Steel Authority of India Limited (SAIL) attained a sales volume of 1.583 million tonnes in July 2020, an impressive growth of about 50% over July 2019. SAIL sold 1.273 million tonnes in the domestic market while it exported 0.310 million tonnes of steel during July 2020, attaining a growth of 29% and 349% respectively. The company has been able to bring down its borrowings below Rs.50,000 crore.

Gold

Gold price surged for the 16th straight session on Friday this week and touched an all-time high of Rs 57,008 per 10 grams in the national capital. Silver, too, continued its upward movement, with the price touching a record-high of Rs 77,840 per kilogram.  Prices of both the metals are at an all-time high.

In the international market, both gold and silver were trading marginally lower at $2,061 per ounce and $28.36 per ounce, respectively. Traders believe both the metals are jumping numbers with still a lot of steam left in them.

Meanwhile, India’s central bank has increased the maximum permissible loan-to-value ratio for gold loans. Indian banks can now lend 90 per cent of the value of borrower’s gold jewellery, up from 75 per cent earlier.

The Reserve Bank of India’s move is aimed at increasing the flow of credit to households at a time when banks have turned risk averse. Experts say gold loans are simple products with loans being disbursed in a short time and across the counter.

Energy

Oil prices were down early on Friday as demand concerns persist, but prices were on track for a weekly gain after hitting a five-month high as the U.S. dollar weakened and U.S. crude oil inventories fell.

Earlier this week, both benchmarks hit their highest levels since early March, just before Saudi Arabia and Russia broke up the previous OPEC+ pact and engaged in a price war for market share at a time when the pandemic was crushing global oil demand.

In India, domestic refiners — both state-owned and private — are initiating annual maintenance shutdowns for their refining capacities. The shutdown coincides with dwindling demand for petroleum products, after a strong revival in May and June.

Reliance Industries (RIL), Bharat Petroleum Corporation (BPCL), and Indian Oil Corporation (IOC) have all undertaken a maintenance shutdown in the past one month in some of their facilities. 

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