Expect nothing, live frugally on surprise.

Tuesday, October 21, 2008

Commodities slump

After reaching record highs a few months earlier this year, commodity prices have spiralled down rather sharply in recent weeks. Although the correction was a matter of time, the rapidity with which prices moved South — be they of energy, metals or farm produce — took many by surprise. Volatility in the foreign exchange market too has contributed to the yo-yo movements of commodities. More recently, the turmoil in the financial markets and deepening concerns ov er global economic growth have seriously dampened market sentiment. Not surprisingly, speculative capital has moved out of the market, bringing prices to more realistic levels based largely on demand-supply fundamentals.
Steel epitomises the commodity sector vagaries. Steel’s initial strength was based around a burgeoning demand from Asia and Middle-East driven by construction and infrastructure expansion in their booming economies. But seasonal factors — summer in the Middle-East and monsoon in Asia— and the month-long Ramadan combined to diminish the pace of activity. Steel billet prices have plunged by as much as 65 per cent from their June peak. Given the uncertain outlook for the world economy over the next two to four quarters, it is unclear if the steel market is at the bottom of the cycle. It is also likely that the price correction is overdone, albeit selectively, in some commodity markets, crude oil for instance.
That said, the steep correction in commodity prices, specifically steel, must make New Delhi take note. Producers are cutting steel prices, as they should, under slowing demand conditions. Primary producers have begun to demand imposition of customs duty to discourage low-priced steel imports. However, their plea is weakened by a depreciated rupee that makes imports less attractive. The slowdown in demand for steel, especially in sectors such as construction and infrastructure, can be tempered by consumer-friendly prices. The situation calls for continuous monitoring of market conditions, but does not call for any major policy response at this point of time, such as raising a tariff wall against imports. No doubt, the administrative restrictions placed on exports earlier during the year when prices increased deserve a review. With inflation still stubbornly stuck in double-digit, any effort artificially to prop the market may prove counter-productive. Let the market test the metal’s mettle.


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