Commodities classified as precious metals, industrial metals and energy tend to behave in a particular manner during various economic conditions. Gold is seen as a safe haven in times of economic and geopolitical uncertainty. Industrials metals witness an uptick in buying when industrial activity in the developed and emerging market economies picks up. Crude oil prices rise as a reaction to geopolitical uncertainties in the oil producing regions of the Middle East that affects the supply globally.
It is generally a trend in case of Gold, which is seen as an investment option in times of economic uncertainty. The price of Gold tends to increase if there is any economic uncertainty, tension within countries and tensions within a country. The price of Gold tends to fall if the economic situation sees improvement and funds start flowing into risky investment assets. There is always an allocation for Gold in the portfolio of global investors if there is an uncertainty about growth in equities across countries. The allocation gets realigned if stocks are expected to show improvement in earnings.
The price of Gold has witnessed high volatility in the last month with uncertainty in the Middle East especially in the wake of war between Israel and Palestine along with the war inside Iraq. Tensions within Ukraine and Russia have also been responsible for uncertainty in the global economic environment. Gold price reached a low of USD 1244 /Oz in the first week of June 2014 and rose to USD 1340 /Oz in the second week of July 2014.
Gold price would remain volatile and tend to increase if there is any deceleration in the growth of the developed economies along with uncertainty in the global economic environment. It would decline if tensions in the Middle East subside and developed economies show a continuing trend of growth and economic improvement. Economic data from the US is seen as the key trigger for the price trend in Gold.
Crude Oil has also become highly volatile due to tensions in the Middle East. The increase in tension in the Middle East affects the supply of crude oil from the region thereby escalating prices in the short term. The price of crude oil rose to USD 115 /bbl in third week of June 2014 amidst increasing uncertainty over the supply of crude oil from the second largest producer of crude oil. Prices however cooled down to USD 106 /bbl as other leading producers increased production.
Price of crude oil is not expected to decline sharply in the near future but remain flat if the situation does not show any improvement or escalate if the situation worsens going ahead. Elevated costs would mean higher importing prices for India as 80% of the requirement is imported from oil producing countries.
Copper is an industrial metal essential to urban modernization. China and India are expected to be the largest consumers for the metal as the need for it would continue to increase as economic growth picks up pace in the near future.
Chile accounts for over one third of world’s copper production followed by China, Peru, United States, Australia, Indonesia, Zambia, Canada and Poland. Major exporters of copper ores and concentrates are Chile, Peru, Indonesia, Australia, Canada, Brazil, Kazakhstan, United States, Argentina and Mongolia. The biggest importers of copper are China, Japan, India, South Korea and Germany.
Copper is the world’s third most widely used metal, after iron and aluminium, and is primarily used in highly cyclical industries such as construction and industrial machinery manufacturing. Profitable extraction of the metal depends on cost-efficient high-volume mining techniques, and supply is sensitive to the political situation particularly in those countries where copper mining is a government-controlled enterprise.
Copper continues to see a positive trend as economic activity is expected to pick up further in the developed world countries followed by higher economic growth in the emerging market economies even though some countries in the Middle East region experience political turmoil. Copper increased to USD 7102.50 /MT in July from USD 7041 /MT in June of 2014. This is a change of 1.67% from last month and 4.14% from one year ago. Prices have however remained volatile due to mixed economic data coupled with geopolitical tensions globally.
Aluminium is a lightweight, corrosion resistant metal used mainly in aerospace applications, as a construction material, in packaging, automobiles and railroad cars. Resources of bauxites, the raw material for aluminium are only located in seven areas: Western and Central Africa (mostly, Guinea), South America (Brazil, Venezuela and Suriname), the Caribbean (Jamaica), Oceania and Southern Asia (Australia, India), China, the Mediterranean (Greece, Turkey) and the Urals (Russia).
Aluminium increased to 1965.50 USD/LB in July from 1856.75 USD/LB in June of 2014. This is a change of 6.02% from last month and 11.85% from one year ago. The shares of Aluminium producing companies rose in the month of June 2014 on expectations that the Automobile and Aerospace sector would show an increase in demand for the metal.
Zinc is a lightweight and corrosion-resistant metal. It is often used in die-casting alloys, castings, brass products, sheeting products, chemicals, medicine, paints and batteries. The biggest producers of zinc are China, Peru, Australia, United States, Canada, India and Kazakhstan.
Indonesia’s export ban and the closure of major zinc mines pushed nickel and zinc prices higher year to date. Zinc increased to 2371.50 USD/MT in July from 2214.25 USD/MT in June of 2014. This is a change of 8.81% from last month and 31.46% from one year ago. Nickel decreased to 18899 USD/MT in July from 18969 USD/MT in June of 2014.This is a change of -2.41% from last month and 34.64% from one year ago.
Steel is an alloy of iron and other elements, mainly carbon. Steel is one of the world’s most important materials used in construction, cars and all sorts of machines and appliances. By far the biggest producer of crude steel is China, followed by European Union, Japan, United States, India, Russia and South Korea. The biggest producers of iron ore are: China, Australia, Brazil, India, Russia, Ukraine and South Africa.
Steel increased to 430 USD/MT in July from 405 USD/MT in June of 2014. This is a change of 6.17% from last month and 168.75% from one year ago. Demand for the metal is expected to rise from current levels on account of continued revival in growth of the developed economies and increase in the growth rate for the emerging market economies.
The second largest economy in the world has significant amount of volume in international trade of commodities and the decline in growth to sub 8% levels for the economy has seen a decline in the trade of commodities internationally.
Table 1: Monthly Market Movement