Commodity prices and future in 2012

Politics rather than economics play a dominant role in determining the prices of this commodity .The rise in the prices of crude in 2011 again illustrates this point suitably enough. Brent crude oil prices have consistently remained over USD 100 per barrel since march 2011, Which sadly has nothing to do with a significant increase in demand .Rather, we find that the global oil demand has continuously been revised downward .The international energy Agency (IEA), in the recent monthly market report, lowered the global demand of crude oil by 0.2 million barrels per day (MBPD) TO 90.3 MBPD, it’s fourth cut  for the 2012 forecast .The rise in prices was more due to a disruption in supply from middle  east and north African (MENA) countries flowing political unrest there .

However, we believe that in terms of supply, things will normalize by the second half of 2012.Moreover, OPEC  alone is investing around USD  300 billion  in the next five year, which will improve the spare capacity leading to softening of crude prices in 2012,Nevertheless we cannot expect the fall in crude prices  to be sharp as we saw in 2008 ,on account of an increase in the break even cost of crude oil ,which is about USD 80-90 per barrel .Therefore in the absence of a robust demand ,we  expect the prices to be in the range of breakeven (USD-   80-90/bbl)levels  unless there is any significant  change in the equilibrium either due to demand destruction of the breaking up of the euro or any unforeseen political upheaval   that cause supply disruption .”Apart from the European crisis concern over Iran’s nuclear program will also dominate sentiments, says Deo.  

When we try to gauge the higher range of the crude prices, we find that according to Citi report USD 120 per barrel  is a pain point (Thought it is dynamic  and will change with moment of USD )When expenditure  on energy would consume about nine percent of the global GDP. Historically, this has proved to be recessionary for the world economy, and we believe that any increase in prices about that will trigger more supply from the spare capacity that is currently at MBPD, leading to downward pressure on crude prices. Hence we feel that the international markets crude oil prices will trade in the range of USD 80-120 IN 2012.

Whatever happens globally ,on the domestic front we cannot expect the prices to be in the range as we suffer from one extra risk point ,which is the INR’s movement against the USD .The rupee has already depreciated by almost 18 percent year till date ,with most of that happening in the last four months. A depreciating rupee adversely impacts downstream companies like HPCL, BPCL, etc. and positively impacts upstream companies like ONGC. Since fuel prices are yet to be fully decontrolled, any increase in crude prices increase and under recovery and subsidies that will impact the oil marketing companies adversely.

In the current scenario it is estimated that for every 1 depreciation against the dollar, the under recoveries of state run of marketing companies increase by approximately 8400 crore and the net of impact bills goes up by 9000 crore .We believe that in 2012, the prices are going to be more stable than in 2011 and are likely to hover around USD 100 per barrel. However this sector is still dominated by the state owned companies and the absence of any clear policy guidelines in term of implementing the Kirti Parikh report on de-regulating the sector will make returns from it is sector uncertain as the government can change its sharing burden.

Future of Copper in 2012

Copper which is also known as industrial application in construction, electrical, consumer product, etc-makes it an economic bellwether. Therefore it is no coincidence that the worsening global economic condition is accompanied by a sharp fall in copper prices .Since march 2011, copper prices have fallen by more than 30 percent . Rio Tinto got the order for making Olympics 2012 Medals Tally Update , where they will be manufacturing Olympics Gold , Bronze and Silver Medals . Shakeel Ahmed ,CMD, Hindustan copper explains such a fall by saying ,”There are actually two drivers  of copper prices :one is the  Chinese  economy and the second is the us economy .At the current moment ,the Euro  zone crisis is the biggest dampener that has led to correction in the prices of copper .”There would have been further fall had there been no production cuts in Chile, Peru the United States by four percent that account for almost half of the copper ore production globally.

However China, which accounts for around 401 percent of the worlds copper consumption, influence copper prices in a major way. The current weakening in the copper prices has a lot to do with that is happening in China. According in the international copper study group (ICSG , China’s apparent usage declined by six percent in the first half of the year. It’s refined copper imports too declined by 40 percent .This was mainly due to a lack of seasonal restocking that Chinese buyer undertake during the spring .Instead they turned to drawing on inventories amid historic high prices and tight credit conditions.

Going forward the copper prices in 2012 will be determined by the inventory cycle of China and the economic data coming from the USA and Europe .According to the ICSG, the world copper usage for 2012 is expected to grow by 3.6 percent, mainly supported by a growth of six percent in China .However if we want to put a range to the prices of copper this year, it would be at USD 4000 at the lower end and USD 80000 at the higher end .According to Ahmed ,”My mining cost of  production  is USD 3000 per ton , but since we have fixed costs of other activities , it take it to around USD  4000 per ton “This is applicable  to almost 90 percent of the total producers  of copper around the world.

As far as the upper range of copper prices is concerned, we believe that it will be around USD 8000 per ton .This will result from the demand pickup in the latter half of 2012,as the US home sales data will improve further .Japan will start its comprehensive reconstruction  programming after  the  tsunami and most notably ,China’s power industry that solved its  technical problems in 2011 will once again start demanding more copper Ahmed agrees with this adds ,”I do not see it going above USD  8000 per ton ”.

Coming back to India, the country faces an imbalance between copper production and its smelting capacity .in 2010, India reefing capacity in 2010; India refining capacity was more than one million ton, which requires 100 million tons of copper  ore (assuming one percent of copper content).Compared to that we have mined merely 3.6 million tons of copper  ore. However the demands for copper in India is just o.6 million ton and the rest of the refined copper is exported .Hindustan copper is the only company in the listed space that is vertically integrated and percent in the entire value china of copper .In addition to this the order two major players that have major refining capacities are Sterlite and Hindalco industries.