Commodities & Bullion

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Major commodities on Wednesday went up in early trade on the London Metal Exchange (LME) due to short covering and weakening of the dollar.

copper rose to its highest in two weeks on Wednesday, as the dollar weakened and a production outage at the world's second-largest copper mine in Indonesia after a tunnel collapse looked set to continue indefinitely.

Three-month copper on the LME rose one per cent to $7,447 a tonne, ahead of Bernanke's speech. US Federal Reserve Chairman Ben Bernanke will testify on Wednesday before Congress.

Even Gold was near $1,400 an ounce, recovering from a level below $1,340 early this week. Gold was trading around $1,395 while silver was at $22.85. The rise in commodities has been attributed to the correction in the dollar. The dollar shed some gains against a basket of currencies ahead of the Bernanke testimony.

A weaker dollar typically lifts assets priced in the unit because it makes those cheaper for holders of other currencies.

Freeport McMoRan Copper and Gold Inc on Wednesday it would not restart production at its Grasberg copper mine in Indonesia after the tunnel collapse that killed 28 workers till it is convinced of the mine's safety.

Even on MCX, copper was up 2.36 per cent to trade at 419.35 per kg. aluminium, lead and zinc were also up 1.6-1.8 per cent, while gold was trading 1 per cent higher at Rs.26, 389 per 10 gram. However, interestingly spread between June and August MCX gold contracts have risen from around Rs.100 to Rs.200 indicating that there was some short covering.

Credit Suisse on Wednesday said in the report that, "while the currency of choice does impact commodity valuation, it is notable that the broad US dollar trade-weighted index has not moved above its recent range, and we believe that talk of a US dollar bull market is premature"

The research house has said for gold support is $1310 but its ultimate target is $1085 per ounce.

For copper, Arizona-based Freeport's decision to suspend operations at the remote Papua mine is crucial. However analysts are not bullish technically.

Barclays Commodities Siki Cooper said that, "We view prices above $7,500/t as an opportunity to short copper. However, sentiment across the base metals is weak and without another small bounce in prices there would be downside risk to our Q2 price forecasts for all the base metals. "

Credit Suisse also agrees that industrial raw material has bearish outlook. It said, "With global growth remaining below average in Q1, and the recent data suggesting continued weakness this quarter, we expect most industrial commodities to remain under pressure over coming months, with markets where supply is improving facing the most pressure."

Cotton farmers are slowly losing their fancy towards the fibre crop. Lower yield and reduced realisation are likely to see them shift to other crops this kharif season, which starts from next month, leading to a 10-15 per cent drop in Cotton sowing.

According to projections given by the Textile Commissioner of India, the area under cotton cultivation is likely to be around 11.77 million hectares in 2012-13. In 2011-12, the area under cotton cultivation was reported at 12.17 million hectares.

"This year, cotton cultivation will drop and more farmers will shift to other crops like groundnut. There are issues of less prices and falling yield. There should not be surprise if cotton area falls this year," said N M Sharma, managing director, Gujarat State Co-operative Cotton Federation Ltd.

According to Sharma, farmers received lesser prices than last year. Also, the weather played spoilsport last year, pushing the cotton sowing down.

"Farmers are seeking cotton prices to be around Rs 1,000 per 20 kg, whereas in the current market situation, the prices hover around Rs 720 to Rs 780 per 20 kg for raw cotton. In such a situation, cotton sowing will drop in the range of 10-15 per cent," noted Ahmedabad-based cotton expert Arun Dalal.

In Andhra Pradesh, the price of kapas (unginned cotton) had already fallen below the minimum support price (MSP) in April, but rebounded due to Cotton Corporation of India (CCI) buying cotton.

The MSP of kapas in Andhra Pradesh is currently Rs 3,900 per quintal and 20 days ago, the price was Rs 400 to Rs 500 below MSP.

Exports are also weak, which is further putting downward pressure on the prices, discouraging farmers from taking up the crop next season. Insiders maintained that Chinese buying has stopped and no further export of cotton is taking place.

"There was sufficient demand from mills last year, which controlled a possibility of oversupply in the market. However, now, mills' demand is also weak due to global economic conditions," said Dalal.

Added Piyush Kotecha, a Gujarat-based indenting agent: "Farmers have no option but to sell their produce below the MSP prices as they need the money to buy cotton seed for the upcoming kharif season. CCI and Nafed (National Agricultural Cooperative Marketing Fedration of India) have intervened in Maharashtra and Andhra Pradesh, and have managed to increase the price of kapas, but have not done so in Gujarat and thus farmers here have sold their produce below the MSP."

Cotton importers in China (which accounts for about 60 per cent of India's cotton exports) have been told that if they import, they would have to buy three times that amount from the Chinese government agency. This has hit India's cotton exports to the neighbouring country.

Bangladesh, the second largest importer of Indian cotton, has also cut down its cotton imports, besides Pakistan, which turned to Australia and African countries for cheaper cotton.

Indian mills are also not buying cotton and have imported cotton as it is cheaper compared to domestically-sourced cotton. "The overall scenario is very bleak for cotton at the moment on the domestic market as well as international market," said Rahul Kotecha, a Coimbatore-based indenting agent.

This year, the Cotton Advisory Board has pegged cotton exports at seven million bales, which the industry earlier thought was unachievable due to weak demand for the commodity from major buyers.

The Supreme Court-appointed Central Empowered Committee (CEC) today refused to intervene in matters pertaining to the pricing of iron ore put on e-auction. It also refused to issue directions to ore producers on producing a certain type, beneficial to industries like sponge iron.

Responding to a plea from Karnataka-based sponge iron manufacturers for directing NMDC to reduce the price of lumpy ore sold through e-auction in Karnataka, the CEC said, "We will not intervene in the internal issues of NMDC, nor enforce anything on anybody. We do not understand the market dynamics and we have no mandate to direct them on bringing down the prices."

At a meeting with the ore producers, steel and sponge iron manufacturers in the presence of officials of department of mines and geology, here, the CEC team clarified they were not responsible for fixing the prices and could not direct the miners to reduce prices, sources said.

The representatives of Karnataka Sponge Iron Manufacturers Association (KSIMA), present at the meeting, requested for directing NMDC to produce lumpy ore with certain sizes. They also wanted the prices to be reduced.

The CEC had directed the KSIMA representatives to give the details of the ore procured through legal sources before the imposition of the ban on mining in Karnataka, so they could study the matter.

Currently, of the 70 sponge iron units in Karnataka, 50 are closed due to the high cost ore. The rest are running partially.

The steel industry representatives also appealed to the CEC for intervention in the e-auction procedure and to direct NMDC to reduce the prices for lumps unsold in the last several rounds of e-auction.

About two to three million tonnes of lumps put on e-auction by the NMDC remain unsold in the last few months. It is estimated NMDC has 1.4 million tonnes of lumpy ore.

As regards the renewal of mining leases, expired recently, the CEC said it would look into the details, case by case, and fast-track the process. It also directed the Monitoring Committee to release 90 per cent of the ore sold at e-auctions to miners directly.

India" target="_blank">INDIA’s cable makers face a severe SHORTAGE of COPPER and potential manufacturing delays after the closure of the country's two biggest copper smelters, which has pushed up prices and led to a spike in Imports.  India’s biggest smelter, owned by STERLITE Industries, was shut on March 30 after local residents complained of emissions that led to breathing difficulties, forcing top copper users to rely on rival HINDALCO Industries for almost all their copper needs.  

But a routine shutdown at Hindalco’s Birla smelter this month has raised fears that firms such as Finolex Cables, India's largest electrical wire and cable maker, may have to turn to costly imports or slow manufacturing.  

Hindalco has declined to say how long the Birla smelter will be closed, although industry sources expect a 35-day shutdown.  

A fast-track environmental court resumed hearing a case into Sterlite’s closure and is expected to hear further arguments. Lawyers in the case say a judgment should come by end-May.  

“I think the next period of five-15 days is very critical,” Deepak Mehta, executive director at cable maker Precision Wires India, told Reuters.  Copper makes up about 80 per cent of the raw material costs for cable manufacturers such as Finolex and Precision.  

“If the Sterlite smelter comes back on in the next few days, the situation will improve. If it does not, it will be a serious supply issue,” Mehta said.  Irrespective of when the smelters reopen, June would be far more challenging than May in terms of supply as the plants would take time to ramp up and inventories would be exhausted, he added.  

The Sterlite and Birla smelters account for about 90 per cent of India’s total copper output of 690,000 tonnes. The telecom and electrical sectors take up more than half of the country’s annual consumption of 610,000 tonnes.  

Sterlite parent Vedanta Resources is exporting 4,000 tonnes of refined copper a month from Dubai to help some of its customers offset the supply loss, Sterlite Copper Chief Executive

P Ramnath told Reuters last week.  

Premiums for the purest form of copper have doubled since the Sterlite shutdown, while imports have also doubled to about 8,000 tonnes a month from countries like Russia, Ramnath said.  

Since the closure of the Sterlite smelter, premiums on copper rods have shot up from $165 to $290 a tonne, and might go up to $350 a tonne, a trader with a Mumbai-listed metals trading firm said.  

“Importers are being aggressive and trying to cash in on it,” said Satyajit Misra, head of sourcing at Finolex, adding there have been delays in delivery from Birla because of the sudden surge in demand. “Until next month I am comfortable, after that I don’t know.”  

Finolex uses about 4,000 tonnes of copper a month, while Precision Wires consumes about half as much, but the smelter closures are also affecting smaller users.  

Crompton Greaves, a $2-billion engineering firm which is part of Indian conglomerate Avantha Group and makes everything from transformers to toasters, relies on Sterlite for its 9,000 tonnes a year copper needs in India.  

"We are facing acute shortage of copper and fear production loss," a company spokesman said via email.

Wheat exports from India, the world's second-biggest producer, are set to plunge as farmers hoard the crop and a rally in domestic prices turns buyers away to cheaper supplies from Russia and Ukraine.

Shipments might fall to about 1.5 million tonnes in the year that began on April 1, unless local prices drop Rs 1,000 a tonne or the Indian currency declines against the dollar by 10 per cent, said Rajnikant Rai, chief operating officer of agriculture business division at ITC.

That compares with eight million tonnes forecast by the US department of agriculture. Exports were 5.3 million tonnes in 2012-2013. Futures in Mumbai have rallied 15 per cent since the start of April, even as prices in Chicago were little changed in the same period, as farmers hold back supplies, betting prices might further surge.

Falling Indian supplies may increase demand for the grain from the U.S, the biggest shipper, and the Black Sea region. The world will harvest a record 701.1 million tons next year, the USDA said in a report on May 10.

"I will hold the crop till I get a better price," said Subhash Chand Sharma, a 45-year-old farmer from Papri village in the northern Indian state of Uttar Pradesh, who harvested 18 tons of wheat from the 10 acres he owns. "I can hold on to the crops for next two months. I am hopeful of an increase in prices later as happened last year."

Private Traders
Cash prices may rally to 1,500 rupees per 100 kilograms in the next two months compared with 1,350 rupees paid by the government agencies now, he said. Open market prices jumped 30 percent in two months after the harvest last year as exports picked up and private traders stepped up buying, he said.

Government purchases from farmers have fallen 21 percent to 24.56 million tons as of May 20 and total purchases may be about 33 million tons, 25 percent less than the target of 44 million tons, according to the food ministry. The government sets crop prices to assure farmers' incomes, while selling subsidized grains and cooking oils to the poor. It buys about 30 percent of rice and wheat output from farmers at the set prices.

Wheat has climbed on the National Commodity & Derivatives Exchange Ltd. in Mumbai since the start of April, making supplies from India about $50 a ton more expensive than grains from the Black Sea region. The contract for June delivery advanced 1.2 percent to 1,583 rupees per 100 kilograms today, poised for the highest close this year. Wheat for July delivery climbed 0.7 percent to $6.8525 a bushel in Chicago at 1:51 p.m. Mumbai time.

Market Hangover
"India may not be able to export wheat at current prices," said Abdolreza Abbassian, an economist at the United Nations' Food & Agriculture Organization. "It will be difficult for them to dispose this extra wheat into the market. This could eventually create a hangover in the domestic market and it's a problem for them."

Milling wheat from Black Sea region is available at $260 a ton free-on-board, while feed variety is quoted at $250 after July, while Indian supplies were about $310 a ton on a free-on- board basis, Tejinder Narang, an adviser with Emmsons International Ltd., a New Delhi-based trader.

"Exports may be 2 million tons this fiscal year unless we cut our prices by $50 a ton after July to compete with wheat from Black Sea region," Narang said. "Carrying cost of wheat will increase while quality will deteriorate."

India's plan to export 5 million tons from state stockpiles through private traders have failed to attract buyers because of the minimum price of 14,840 rupees a ton, according to the Food Ministry. The government is not in a hurry to cut the export price, Food Minister K.V. Thomas said May 17.

State stockpiles expanded 12 percent to 42.7 million tons at the start of this month from a year earlier, according to the Food Corp. of India. Production may drop to 92.3 million tons in the year ending June 30 from 94.9 million tons a year earlier, according to the Agriculture Ministry.

Ashok Gulati, the chairman of the Commission for Agriculture Costs and Prices (CACP), has blamed the current food management policy for a paradox of high cereal inflation and bulging food stocks in government godowns. This, he said is being done by increasing money supply into the economy through excess procurement of foodgrains without corresponding supply of these grains in the market.  

In a paper on Buffer Stocking Policy in the wake of NFSB:Concepts, Empirics, and Policy Implications, the noted agriculture economist suggested to the government to liquidate its excess stocks in foodgrains to make food management in the country viable.

Gulati claimed that his idea, if implemented, would help bring down cereal inflation as well as narrow fiscal deficit. In case, companies are allowed to export 102 million tonnes of foodgrains, it may also bring down the country's ballooning current account deficit (CAD), he said.

Gulati, along with co-author CACP joint director Surbhi Jain, pointed out that there are excess stocks with the central agencies even if desirable buffer stocks needed to be held in light of National Food Security Bill (NFSB) are taken into account.

The authors calculated that as against the desirable stocks, the likely stocks held with FCI would be in excess of around 30-40 million tonnes as on July one, 2013.  The value locked in these “excess stocks”, evaluated at their economic cost, ranges from Rs 70,000 crore to Rs 92,000 crore. The economic cost of wheat is estimated at Rs 20,100 a tonne and of rice around Rs 26,430 a tonne for 2013-14.

"This infusion of excess money into the economy without corresponding flow of goods is evident in the paradox of rising prices of rice & wheat amidst overflowing stocks in government godowns," the authors said.

The paper suggested that the states where public distribution systems have been integrated with ‘Aadhaar’ and the probability of leakages in the distribution system reduced significantly may be allowed to lift 36 months of their offtake requirements at a discounted price.

The discount, the authors suggested would be equal to the cost of carrying by the Food Corporation of India (FCI). These states in turn can ask the consumers to lift their
36 months quota at a time with a discount on the PDS price. The benefit is that the consumers under existing PDS can get larger quantities at the beginning itself, releasing some storage space for FCI.

However, the authors pointed out flip side of the recommendation as well-- food scam. "The danger is that if the PDS is leaky, the offtakes can come back to the procurement centre as the MSP would be much higher than the PDS price, and this can lead to another food scam."  

The other option, suggested by the authors is open market sale scheme (OMSS) at the last year’s minimum support price, besides a maximum of 5 per cent taxes, cesses etc.

"At these rates, wheat price will be Rs 13,500 per tonne and rice price will be Rs 19,000 per tonne, say ex-Punjab," they said.

The losses incurred would be administrative expenses in procurement and statutory levies (which are in the nature of centre-state fund transfers), but this would still save the large costs of carrying excess stocks as well as the capital that is locked in these stocks.

If these stocks are liquidated, then the value encashed can help in bridging the fiscal deficit and also improve the flow of rice & wheat in the economy where cereal inflation is still hovering in double digits.

"Unloading about 810 mt of wheat and rice in the domestic market (OMSS) can surely tame and bring down cereal inflation," the authors exuded confidence.  

Despite the wholesale price index inflation coming down to 41-month low of 4.89 per cent in April, cereal inflation was as high as 15.63 per cent. Also, headline number for consumer price inflation came down to single digit at 9.39 per cent in April, but cereal inflation stood at 16.65 per cent.

The paper also recommended the third option to allow the PSUs and private sector to export another 102 million tonees or so at an ex-Punjab price of Rs 13,500 a tonne for wheat and Rs 19,000 per tonne for rice. This would help tide over the current account deficit as well as the deficit financing at home, the authors said.

The current price being offered for wheat export ex-Punjab is Rs 14,840 a tonne, which includes statutory levies that FCI has paid during the procurement process. But this is not attracting much private sector participation, and the PSUs themselves cannot export either, as the global wheat prices are showing a declining trend.

"If early action is not taken, and we feel India is already late in this by at least 45 months, then the chances are that India will have to carry this “excess” level of stocks for the next two years, unnecessarily costing the economy heavily without any purpose and that too at a time when CAD and fiscal deficit are already very stretched."  

The paper said  the availability of these surplus stocks also opens up an opportunity for India to be generous to regional and global needs.

"India could contribute 23 mt for a South Asian Foodgrain reserve, an idea which was floated after the 2007-08 food price crisis. There could also be a window to use these surplus stocks for extending humanitarian aid to Afghanistan and some other African countries through the World Food Programme (WFP) or through bilateral cooperation," the paper said.

This can bring rich dividends to help the poor of the world, and also political goodwill for India, which is aspiring to be a global player, the authors claimed, clarifying that these are their views and not of CACP. End