Bull Everywhere !

Globally almost all asset classes are again touching new highs. Just recently few days ago there were talks of crude oil staying above the $100 per barrel mark. Gold is also heading towards its all time high of $850, last time I checked it was around $830 per ounce. India being the largest consumer of Gold in the world is the major source of the increasing demand for this metal.

The price of gold in India per 10 gram is clearly above Rs. 10,000. The market analysts earlier had predicted that the gold will not touch the 10,000 level because the consumers would move away from gold due to the high price. Infact it was speculated that the gold prices will stay below Rs. 9,700 when the prices were touching the levels of Rs. 9,300.

Another main reason for the increase in the Gold and crude oil is due to depreciation of US dollar. The dollar has weakened in terms of Euro from the June levels of 1.34 to the levels of 1.45 now.


Year on year gold as an investment in India has not done extremely well with returns below 10%. But in the last few months it has made good return of close to 25% to 30%. Infact it makes more sense to invest in the gold overseas in dollar terms particularly in order to best capture the depreciation of dollar. The Gold ETF’s that were recently started in the county were a good example of this. Gold ETF’s have gone up by almost close to 30% in the last six months.

Steel Analysis

The crude iron costs around the world are increasing. The main reason for this is the increase in the freight cost of these goods. The laded cost for the crude iron in India is around $200 per ton for the crude that is coming from Brazil and FOB is around $150. The freight costs for China is also very high reaching levels of around $180 laded cost for a ton of crude iron.

What does this high crude iron cost mean for the producers of steel? Crude iron being a significant raw material input for the steel producers would mean that the prices of steel must rise to meet the increase in the prices of crude iron. If this is not the case then the producer of steel would see a reduction in the margin that they generate.

According to Essar steel the prices of steel have not gone up significantly in the last one year but still their margins have not taken a huge hit. The prices for the crude iron have doubled but the steel prices have gone up only by around 16%. Essar is attributing the healthy margins that they are generating to the captive mines facility that they are having. This means that the captive mines that the steel companies are after does gives the companies a lot of stability in margins. No wonder why steel companies are running after the iron ores in India.

G

Sugar Party Over!

For last two years we have seen a bull market in comodities market. Sugar companies have enjoyed double digit profit growth on the back of increase in the global sugar prices. Commodities market follow a cyclical demand, where prices first go up and then the companies start investing in new facilities resulting in more supply and eventualy the prices start falling. So it could be concluded that the commodity cycle depends on the ability of companies to put up new production facilities. Refer the COPPER Article for more informaion.

The Sugar prices are falling for some time now and analysts believe that there is excess supply created in the market which will push prices down further. The prices of Sugar on London futures have fallen from a high of $490 per tonne to $384.9 on 20th August. Since August is usually depressed period for sugar prices becuase of the full swing of harvest in the centre-south Brazil(largest producer of Sugar) and Northeast Brazil harvest about to get in full gear. This means that the prices could fall by another 10% next month.

Another big factor is increase in production form Russia to Thailand. Russia which is the largest importer of raw sugar is harvesting a larger than expected big beet crop. And Ukraine is also expecting a larger crop this year compared to last year. Plantations arround the world have increased their sugar plantings to take advantage of the Sugar bull market. The supplies from these new plantations would hit the market soon at pull the sugar prices down.

In China the use of alternative sweetners is picking up. They have been using sweatner made from corn for a while and now they are testing sweatner from rice which is also in abundance in China. Another dampner for the demand of Sugar could be crude oil prices. In Brazil they are using their Sugar Cane crop to produce Ethanol as a substitute for gasoline (petrol). They prefer production of Ethanol over import of more expensive crude oil. All this could change in case the crude oil prices fall to levels where profitability on production of Ethanol would fall and a shift towards production of Sugar would take place.

Anyways it is very clear that the Sugar market is facing huge surplus due to higher productions. Some forecasts put ther figure between 3.1 million tonnes to 3.3 million tonnes, but some traders feel that the surplus would be even bigger.

Commodity Watch: Copper

Globally the demand for copper is increasing with its wide uses in industries. The global market for copper has recorded a growth rate of close to 4% in FY 06, in India this growth rate is near 8% and in China growth is in double digits. It is amazing to see that these rates do correspond to the GDP growth rates.

The Copper along with other base metal commodities like Aluminium and Zinc has enjoyed a long bull run. In the 90's there was a global bear market for Commodities (base metal & precious) and many copper mines did not expand their production capacities due to low demand. Now due to high demand for Copper the mines are running a full capacity and developing new capacity. But still the demand cannot be met because of long gestation period for new mines; it takes atleast 10 -15 year to explore and set up new capacity. The same is true for other metal commodities. This is the reason why we are witnessing a huge bull market for metal commodities.

Percentage change in Copper prices

One week  - 4.1%
2 month    - 11.5%
6 month    + 51.44%
One year   +100%

From above you could see that the copper eventhough still in bull (1 year) has lost a lot in last few months. On Friday the Copper was trading at $ 6,780 per tn compared to close to 8,000 few months ago. This price decline could be attributed to the 6.8% increase in the production of copper to 17.5 million tns compared to the 16.5 million tn consumption. It is to be noted that there are two ways for increase in production of copper one by minning another through recycling. According to analysts due to the cappacity bottle-neck the copper industry would expand in the other side of minning (recycling). Already close to 75% of copper production is through minning rest 25% from recycling.

Through analysis of Copper we could se that the commodity bull cycle (usually 10 year long) that started 5 years ago would continue. But in short term it is very difficult for copper prices to breach the 52 week highs set few months ago.