Commodity market bullish, but manufacturing demand may take more time to improve

By: | Published: August 30, 2016 6:08 AM

The current scene in the commodity market can best be termed as a bit bullish. Production is rising in response to a certain surge in demand.

Good monsoon is likely to enliven the agriculture sector and with that the increase in rural income is to translate into higher growth in demand for consumer goods and houses. (Reuters)Good monsoon is likely to enliven the agriculture sector and with that the increase in rural income is to translate into higher growth in demand for consumer goods and houses. (Reuters)

The current scene in the commodity market can best be termed as a bit bullish. Production is rising in response to a certain surge in demand.

Good monsoon is likely to enliven the agriculture sector and with that the increase in rural income is to translate into higher growth in demand for consumer goods and houses.

The commodity prices are indeed moving up, but not uniformly across all products.

From the next month onwards with the additional income in the hands of government employees, the boost in demand for household goods, real estate, automobile and travel would benefit these segments a great deal. The incoming festive seasons would only contribute positively.

In some products, however, the sudden rise in prices may not last long.

The rise in hard coking coal prices at $120-125/t fob Australia is an offshoot of logistic problem faced by the Chinese miners, which has hampered domestic production and transportation leading to a rise in import demand by China.

The reason for increase in iron ore prices from a level of $50/t cfr China in June 2016 to $61.4/t cfr China in August 2016 can also be found in sustaining steel production in China (only 0.5% fall in crude steel production in Jan-July 2016) and the planned cut in iron ore production by the 4 majors.

The situations leading to the price rise in these commodities may be purely short-lived.

Riding on the demand for inventory build-up and commencement of construction activities at the end of monsoon, the long product prices in the country have some strong reasons to move up.

Already there is higher capacity utilisation by the re-rolling sector with availability of long products from them increasing by around 4% in the first 4 months of the current fiscal.

As the demand from project construction and real estate sector goes up in the coming months, there is a renewed need to improve the quality parameters by the small and medium enterprises.

One method could be to enhance the share of melting scrap in the charge mix in the furnaces.

The prices of imported scrap may be a dampener for their higher use especially due to the unpredictability on their price movement.

Turkey has been a major importer of scrap and the drop in demand for constructional steel in Turkey a few months back had led to a decline in Scrap prices which have since been sliding up.

It may be also be noted that sponge iron production in the first 4 months at 5.1 MT have gone down by more than 12% compared to last year due to lower demand from the users leading to the wholesale prices of sponge iron declining by 2.4% in the first 7 months of the current year.

The official price indices for various long product categories indicate that during January to July in the current year, the WPI index for Billets, Rebar, Joists/Beams have gone down by 3.2%, 0.5% and 0.6% respectively, while long steel products have risen marginally by 0.1% during the period.

As regards flat categories, the WPI indices for HRC, Plates, CRC and Coated sheets have all shown rising trends, ranging from 2.3% in respect of CRC to the maximum of 4.8% for HRC, the indices for flat steel products moving up by 4.8% during the last 7 months.

Thus fall in imports due to trade remedial measures by the government has benefited flat categories more as compared to long. But the role of demand pushing up prices is likely to be more predominant in respect of long products.

On an overall basis, the increase in WPI for manufactured items (65% weights) has shown only a marginal rise of 2.4% during the period.

The manufacturing sector is yet to get over the demand-constrained scenario.

The rise of WPI by 4.8% by July 2016 was primarily contributed by prices of food products that moved up by 7% and prices of cereals and pulses rising by 6.5% in the last 7 months.

The supply-constrained perishable goods market is certain to enhance availability in the coming months. But factors pulling down demand in manufacturing may take a longer time to settle.

The author is DG, Institute of Steel Growth and Development. Views expressed are personal.

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