Global commodity prices extended their worst losing streak since December 2008 on Friday on fears of major economies slipping back into a recession, but a decline in price of crude and key fertiliser inputs may actually help India, a big importer, reduce its fiscal strain. However, domestic metal companies could see a dip in their profitability if the global demand for copper and aluminium remains subdued for a considerably long period, adversely impacting their pricing powers.
Indian steel and sponge iron companies which depend on merchant purchases for iron ore requirements could benefit if Friday?s dip in steel rebar prices extends to iron ore and turns out to be the beginning of a prolonged trend of decline in its prices. However, a fall in iron ore price would have little impact on major primary steel producers like SAIL, Tata Steel and Essar who have captive mines. Domestic iron ore exporters including public sector NMDC could also be impacted if the global iron ore prices suffer a sustained slide, as export prices tend to be the reference price for domestic sales as well.
Friday?s price dip was felt across most major commodities including crude, steel, copper and aluminium, but most analysts commented it was a speculative, exaggerated response to the fear of a double-dip recession in the US. ?With the sophistication of the markets, any disturbance, even if caused by speculative factors, get quickly transmitted across market segments,? said AS Firoz, an independent steel analyst.
Brent crude dropped $2.95 to a day-low of $104.30 on Friday before rebounding to $108.25 a barrel by 1145 GMT. Copper on the London Metals Exchange skidded more than 1% and Shanghai-traded aluminium and zinc hit their downside limit as investors scurried for cover following Wall Street?s worst selloff since the 2008 global financial crisis.
India is one of the world’s largest importers of crude and fertilisers ? the two commodities that account for a bulk of the government’s subsidy burden.
While oil accounts for 33% of India’s import basket, the fast-growing economy is also experiencing a sustained momentum in growth-linked imports. So, a fall in key commodity prices will have multifarious benefits for the Indian economy. Any fall in crude prices will help the country trim its oil import bill and in its efforts to meet the target to reduce the central government’s fiscal deficit for 2011-12 to 4.6% of the gross domestic product. A decline in crude prices also drags down the cost of producing fertiliser, which uses natural gas as feedstock. The development comes at a time when the lower-than-expected increase in revenue collection coupled with an inability to cut expenditure, in the wake of new populist schemes like a food security law are threatening to derail budget numbers.
A fall in import bill of key commodities like crude and potassic and phosphatic fertilisers will also reduce India’s merchandise trade deficit and thereby the current account deficit which is pegged at 2.7% of the GDP for 2011-12.
The petroleum ministry expects the country’s oil subsidy in the fiscal through March 2012 to exceed Rs 100,000 crore. Industry executives estimate that fertiliser subsidy could cross Rs50,000 crore this fiscal. ?If (brent) prices stabilise around $110/barrel, that is going to reduce subsidy burden. We will have to see if the downward movement is going to be a trend. But certainly, the economic downturn is more probable now than what appeared last month,? said Saugata Bhattacharya, chief economist with Axis Bank. ?From now on, many things will be data-driven. The world is waiting for US jobs data to come out,? he added.
Although global equity markets suffered the worst losses, shedding as much as $2.5 trillion or roughly 8.5% in a week, key commodities, including crude, are expected to reel under the impact of Europe’s worsening sovereign debt crisis and the gloomy US economic outlook. Standard & Poor’s GSCI Spot Index of 24 commodities posted a weekly loss of 6.6% on Friday, the worst since May.
Any escalation in the current crisis will prevent a flare-up in crude prices, although big consumer China holds the key to any pick-up in demand. India can continue crude imports for some time at lower prices if China doesn’t intend to stock up huge quantities of crude taking advantage of a slump in prices and, thereby, boosting demand. Shanghai-traded rebar steel shed over 2% to its lowest in around a month on Friday, joining a rout in other commodities. India, which also imports steel in large volumes, may benefit from the price fall. ?Every buyer of steel looks at prices, and if prices weaken, it will have impact on imports,? Firoz said.
