NEW DELHI: Like equity and debt markets, commodities also faced its fair share of problems due to the coronavirus-induced lockdown. This period has been marked with widespread disruptions in trade, leading to sharp drawdown in prices of most commodities, barring gold.
The lockdown has had a crippling effect on agri-commodities, as mandis had to be shut hampering price discovery. Demand destruction and shutdown of factories across the world led to a sharp drop in export demand for metals, foodgrains and spices. However, in these crushing times, gold shone brighter as traders and investors rushed to the safety of bullion.
With the reopening of economies, things are looking relatively better. But analysts say a cash crunch among traders and speculators, which has already taken a toll on volumes, can emerge the biggest problem for the asset class.
Metals turn brittle
The base metal complex took a severe beating after the coronavirus branched out to over 210 nations, accounting for over 3,19,000 deaths. In order to combat the fast spreading virus, many countries have announced nationwide lockdowns, leading to a standstill in the global economic activities.
The economic disruption due to the pandemic has derailed global growth prospects and raised recession worries.
A halt to industrial activities amid plunging crude oil prices has unleashed panic in the markets, pushing down base metal prices,” said Yash Sawant, Research Associate, Commodities, Angel Broking. As a result, prices of aluminium, nickel, tin, zinc, copper and lead have declined up to 22 per cent during January-March.
The global scenario improved by the end of April, as some nations eased the virus-related lockdowns.
Signs of resumption in economic activities offered some support to industrial metal prices. China, the epicentre of the implacable virus, has witnessed a strong recovery in recent months. As a result, prices of select base metals like zinc, copper, nickel and lead have risen up to 10 per cent since March.
China’s import of crude oil, coal, iron ore and copper surged in April 2020 from the low levels reported in March, which indicates growth in the demand post lockdown in the world’s second largest economy.
Sawant says copper and nickel might turn out to be a better investments going forward, as after the economic slump most economies might focus on infrastructure development in order to support their economies.
Golden era continues
Gold prices witnessed a significant surge in recent times owing to heightened risk-off sentiment, highlighting the importance of the yellow metal as a safe haven asset. The precious metal has jumped nearly 18 per cent on a year-to-date (YTD) basis till May 11, and over 40 per cent in last one year.
There are expectations that the Covid-19-driven contraction in economic activity will lead to a painful recession across the world. As per IMF, the global recession is likely to be at least as bad as the Global Financial Crisis of 2008. The yellow metal had jumped more than 150 per cent during 2008-2011.
Naveen Mathur, Director of Commodities and Currencies, Anand Rathi Shares and Stock Brokers, said gold prices should stabilise around Rs 48,500 level in the near term. “However, it may rally towards Rs 55,000 in the coming year due to the global economic uncertainty.”
Gold traded at a record high price of Rs 47,961 per 10 gm in the domestic market on Tuesday, May 19, while silver traded at Rs 48,190 per 1 kg. The white metal has unique properties as both a precious and industrial metal, which makes it attractive.
Silver is down 8 per cent on a year-to-date basis, but has risen over 5 per cent in last one year. “We will see a revival in industrial metals once manufacturing activity starts. Silver is a very dynamic commodity. You should not trade in silver if you do not have risk appetite,” Mathur said.
Agri-commodities: Cash crunch hits volumes
Prices of agri-commodities crashed to multi-year lows, as record produce and a plunge in demand due to lockdown gave the bears enough ammunition to come out with all gun blazing. Turmeric price hit a three-year low on NCDEX while cardamom hit a one-year low. Jeera made a three-year low, as prices crashed due to a halt to exports.