Silver-linings over commodity price clouds

Written by Raj Kumar Ray | Updated: Jan 15 2014, 08:27am hrs
The IMFs latest forecast of commodity price outlook shows the global economy is unlikely to see a quick revival in 2014. Futures markets show most commodity prices remaining flat or declining over the next 12 months, with the exception of gasoline, natural gas and some food products, IMF said in the report. Going by the latest commodity price trends, it is likely that global GDP growth rates may fall short of IMFs October forecast of 3.6% for 2014.

But there is some good news for India. First, IMF forecast oil prices, both WTI and Brent, are expected to decline due to an expected rise in non-OPEC supplies, and possible recovery from outages in OPEC nations. The likelihood of WTI going above $110/barrel has decreased to 13.5% from 16.4% earlier, indicating declining overall risks for WTI. However, the likelihood of WTI falling below $90 and Brent below $100 next year (12 months forward) is about 40% compared to 50% a month ago, meaning chances of oil prices sliding sharply are also less. A flat or decline in oil prices will be a boon for India, which has been struggling to tame the twin deficitsfiscal and current account. Softer global prices and continuing domestic price hikes on diesel and petrol are quite likely to restrict its subsidy bill below 2% of GDP and slash the fiscal deficit to 4.2% in FY15 from the targeted 4.8% in FY14.

The other good news is gold futures prices are flat, which is reflective of muted demand from countries such as India due to high customs duties and other curbs. The likelihood of per troy ounce gold prices below $900 (12 months forward) has increased to 5.2% from 3.3% a month ago reflecting weakening investor demand. It is specifically because of lower gold imports that Indias CAD has fallen to 1.2% of GDP in Q2 from 4.9% in Q1 and 4.8% in all of FY13. The fact that global copper prices, a gauge for industrial growth, also remain dull mirrors sluggish global recovery. Indias industrial output was down 0.2% in April-November and it is likely to remain flat if not down in all of FY14, which may keep the overall GDP growth at 5% or less.

On the food front, while wheat prices may rise slightly but rice prices are headed downhill. While this bodes well for countries struggling to keep a lid on food inflation, there could be some loss for grain-exporting nations, including India.