Sharekhan: Commodities Buzz

Base metals: Zinc and nickel prices rise Base metals had yet another lacklustre day that was spent in search of direction. Nickel and zinc were able to post gains, while the rest of the complex settled lower. Today, the base metals complex could remain under pressure on falling crude oil prices and strengthening US Dollar. The US Dollar has been successfully talked up by the Us Federal Reserve honcho Mr Bernanke, though the fundamentals remain weak. So, the recovery of the greenback could be Short-lived. Yesterday’s ADP employment data threw an upside surprise, as the data showed that the companies in the US added jobs in May unexpectedly. The 40,000-increase on overseas orders topped the forecast of a decline of 30,000 jobs.

Considering the positive ADP data, the US non-farm payroll data could come as somewhat positive, relatively, as compared with the forecast that the overall US economy would lose 60,000 jobs in May, the fifth straight month of declines. The same thing happened last month as well when the number of jobs lost came much lower than the forecast. This notion could support the US Dollar in short term.

Base metals are still driven by the US Dollar and crude oil prices. Of late, the USA had a string of better-than-expected data, however base metals complex has remained under pressure, as we have seen traders selling into rallies.

Crude oil prices have fallen sharply in the last two days and are now nearly $13 lower than the peak of $135 level. The decline in prices is due to rollback of subsidies in India, Indonesia, Sri Lanka, and Taiwan. This step is much needed, as demand would remain unaffected despite rocketing prices as long as the consumers are kept shielded from rising prices.

As per the Department of Energy report released yesterday, stockpiles of crude oil products were sharply up. This added to the downside pressure on oil. Another factor that has been instrumental in the fall of crude oil prices is Mr Bernanke’s speech made day before yesterday in which he supported the US Dollar and indicated clearly that market shouldn’t expect any more rate cuts.

Sugar: Low prices to continue Sugar is to continue to trade at low prices on good stock with millers and low demand. Increasing selling interest of millers to release their monthly quota due to dull demand is supporting the tone. The demand this summer is lower due to the recent rainfall in northern India and good progress of monsoon so far. Demand from ice cream and cold beverage manufacturers are seen to be low this year. Moreover, good crop in Brazil is restricting the scope of Indian export and thereby pressurising the prices in India.

Turmeric: Prices likely to go downTurmeric prices are likely to go down due to lower demand at higher price level on the anticipation of good yield this year amidst good progress of monsoon so far. Monsoon has already reached most parts of south India on June 2, three days earlier than scheduled. Early arrivals of monsoon in Andhra Pradesh, the largest turmeric producing state is likely to increase the acreage and this in turn is resisting the market from further rallies. Turmeric is generally cultivated after the start of monsoon. Good prices in recent times are also prompting the farmers to grow the crop. However, good export demand combined with lower production is likely to support the market at lower levels.

Barley: Prices to trade higher Barley is expected to trade at higher prices on the back of good domestic and export demand. Growing domestic demand due to higher consumption of beer is supporting the market. The Indian beer market is growing at the rate of around 20 % and barley is the main ingredient of beer in the form of malt. Export enquiries are also adding to the underlying bullish tone and helping to sustain the market at higher side for short and medium term.

Cardamom: To trade higher Cardamom prices are expected to rise higher due to lower stock in the market, as the yield was low last year. As per trade sources, stock position of growers and stockists is declining sharply with the last year’s production almost coming to an end. However, good summer precipitation is likely to boost the production this year.

Crude oil could fall to $119-$120 level this week. Bullion complex remained supported despite falling crude oil prices as the return of concerns about the health of the banks is seeing some money moving back into the bullion complex. While gold and silver are expected to get good buying support at lower levels, declining crude oil prices would exert a downside pressure on the bullion complex. So, soft bullion complex would be adding to the downside pressure on the base metals complex.

Nickel bounced back on bargain hunting as the prices have fallen quite sharply in the last few days. The metal is trying to form a base around $22,000–a crucial support level. As the support was held fast yesterday, bargain hunting was the order of the day. The metal closed with gains of $490 at $22,795. It was its third day of gains in a row. The London Metal Exchange (LME) stock data was supportive, as the stockpiles fell by 228 tonne. Nickel has been falling despite the depleting stock levels as the stainless steel sector doesn’t look promising in terms of the production. LME cash-to- three month spread tightened by $17 to $125(c). In short term, the metal is likely to hover around $22,000 level. During the day it could consolidate its gains and could move lower.

Support is seen at Rs963/Rs942. Resistance would be felt at Rs977/Rs985/Rs995. Copper closed with losses of $35 at $7,875. LME stockpiles fell by 650 tonne. Cancellation rate was decent, as 1,675 tonne moved to the cancelled category taking the cancellation ratio up to 10.49% from 9.56%. Despite the softening prices, LME cash-to-three month spread has tightened further. The spread has tightened by $24 to $148 (b). This speaks volumes about the prevailing tightness in the market. High backwardation means that prices won’t collapse, though limited downside is what we are expecting as of now. During the day, the metal is expected to decline further on rising Dollar and soft crude oil prices.

We peg the support at Rs333 and then at Rs328.50. Resistance would come at Rs339. Rest of the base metals are expected to trade in line with copper. Aluminium would remain under pressure on falling crude oil prices. Zinc rose yesterday on arbitrage trading by the Chinese traders. LME stock data was also supportive. However, today it is likely to trade in line with copper. We advise a sell on rise in base metals.

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