Commodity price outlook looks favourable for domestic producers

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Published: May 1, 2018 1:54:04 AM

It is customary to predict the short term outlook for the market in the first month of the new financial year. The primary basis of the prediction relates to the behaviour of the economy as it is projected to grow in the coming year.

oil, oil prices, crude oil, gas, market, economy, GDP, IMF, global GDP, CADThe rising margin for steel products in the country buoyed by comfortable raw material price forecasts (for iron ore and coking coal) for 2018 and 2019 would usher in a good period for the producers and also for the consumers on account of higher availability.

It is customary to predict the short term outlook for the market in the first month of the new financial year. The primary basis of the prediction relates to the behaviour of the economy as it is projected to grow in the coming year. While the global economic outlook is brightened by recovery in the US, the EU, South Korea and Japan, the emerging economies of China and India followed by Vietnam, Turkey and South Africa are projected to achieve a healthy growth in the current year. The global GDP growth of 3.1% in 2018 (World Bank: January 2018) is dominated by 2.5% growth in the US, 6.4% growth in China and 7.3% growth in India, the latter being the highest among others.

The IMF projection revised in April 2018 has projected a higher GDP growth for each of these countries and the global GDP has been predicted to grow by 3.9% in 2018. A healthy economic growth would entail a robust commodity market in terms of prices, profitability and trading. The latest World Bank report on commodity markets outlook brings out these facts with a prediction for 2018 and 2019. The average crude oil prices are predicted to be $65 per barrel in 2018 and also in 2019. This is around $12 per barrel higher than 2017 level, but lower by $9 per barrel from the high level in April. It has an adverse implication for CAD in India which is currently pegged at 2% of GDP. The price projection is based on a robust demand assessment in the face of production restraint by Opec and non-Opec countries and rise in US shale production.

Any deviation in this apparently stable scenario like fall in output arising out of political instability in the Middle East may lead to increased oil prices. Metal prices are likely to increase by 9% in 2018. Aluminium prices surged recently due to US sanction on supplies from Russian producer Rusal and it is natural that China which produces around 55% of global aluminium becomes the natural source. However, the recent US sanction against China with a 10% duty imposition would further fuel the aluminium prices that have been projected to be at average $2,175/tonne in 2018 and $2100/tonne in 2019.

Nickel prices have been projected to rise 30% higher compared to 2017 level. A major driver of nickel demand is likely to be the batteries for electric vehicles. However, as nickel-sulfate needed by EV batteries is not available from half of global nickel production, it remains a challenge for the new capacity created by nickel industry. The SS industry is specifically influenced by higher prices of nickel and this may result in more use of nickel free SS. The average prices of nickel are estimated to be ruling at $13,500/tonne in 2018 and $13,828/tonne in 2019.

It is pleasing for the steel industry to know that average iron ore prices have been projected to decline from the current level of $67/tonne to rule at $64/tonne in 2018 followed by $60/tonne in 2019. The projection assumes a decline in Chinese steel production due to planned output cut in 2018. The major producers of iron ore during 2017 were Australia, Brazil, China, India and Russia. They would be supplemented by Ukraine, South Africa, Iran and Canada. The domestic prices of iron ore in India would be largely influenced by the global price level and internal steel demand which is projected to grow by 7-8% in 2018. Zinc prices are on the rise and likely to prevail at $3,200/tonne in 2018 and $2,900/tonne in 2019 primarily due to growth in demand for galvanised steel. Stringent environment regulations have brought in supply restrictions in mines in China, Australia and the US and led to secular rise in prices from 2015-16.

Thermal coal market would be influenced by global approach to environment regulations as in the US, the low priced natural gas has led to lower coal usage in power sector. China is investing in cleaner energy to reduce energy intensity. The coal consumption in Europe is going to be significantly minimised in next decade. However, Indian demand for thermal coal would continue to be robust. The thermal coal prices have been projected to reach $85/tonne in 2018 and decline to $75/tonne in 2019.

The coking coal demand by Indian steel producers would come down in the next decade but by a much slower rate compared to all other countries despite installation of various technologies and processes in Indian steel plants like CDI, use of pulverised coal, among others. The current price of coking coal at $195/tonne fob Australia is projected to come down to $140-155/tonne fob Australia in 2018 (WSD).

The rising margin for steel products in the country buoyed by comfortable raw material price forecasts (for iron ore and coking coal) for 2018 and 2019 would usher in a good period for the producers and also for the consumers on account of higher availability.

The author is DG, Institute of Steel Growth and Development

(Views expressed are personal)

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