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Nickel may rally 30%, a crude 'super cycle' can push prices to $90 in FY22, says Navneet Damani of Motilal Oswal

After the rally, crude can take a breather in the short term but positives are likely to outweigh the negatives in the medium term and continue to lend support, says Damani.

April 06, 2021 / 12:59 PM IST

Navneet Damani, VP–Commodity Research, Motilal Oswal Financial Services, expects copper to keep shinning bright this fiscal as well on the back of electrical vehicles (EVs), greater demand for solar energy and infrastructure development. Indian prices for copper could reach as high as Rs 750-760 per kg, he says.

Nickel comes a close second in the base metal space for Damani who sees lower inventories and rising demand for EVs and stainless-steel sector fuelling the rise with a global push for green technologies.

In an interview to Moneycontrol's Sunil Shankar Matkar, Damani foretells a crude oil 'super cycle' in FY22 and says a barrel could touch $85-90. Edited excerpts:

Crude oil grew volatile after hitting $70 a barrel and several experts have said oil may remain in that range till demand recovers fully and COVID concerns are allayed. What are your expectations for FY22? Will it cross $80 a barrel and why?

Crude oil prices can start 'super cycle' in FY22 and can even touch $85-90 a barrel.

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The major reason for upside:
• A quick vaccination drive that will lead to ease in travel, thus supporting oil prices
• OPEC+ output cut policy which is providing a major floor to any selloff
• US shale industry consolidation is helping the OPEC+ to win back market share
• Stimulus policies which will give extra money to individuals for personal consumption, thus supporting crude oil
• Expected demand from China in the coming quarters and its imports exceeding 10 million barrels a day to meet domestic needs. (OPEC determines the price floor and China determines the price ceiling.)

• Increasing consumption needs from other major importers like India, Japan after COVID lockdown will be an additional support

Negatives:

• Jet fuel consumption will only return to 2019 levels by 2024 as travel restrictions, changing travel habits, and the relatively slow progress of vaccinations in low-income economies cap its recovery
• The proliferation of online meetings and conferences, along with cost cuttings by companies, are likely to permanently dent business travel
• OPEC+ member’s tensions as higher prices will bring back uncertainty on compliance front especially from Russia and Kazakhstan

• Iran remains a major wild card as US President Joe Biden's intention to remove sanctions on Iran will mess up the whole output production cut policy by OPEC+

Gold also remained rangebound after falling 20 percent from record highs.  What will be the trend in FY22 and why? What are the chances of it falling below $1,500 an ounce or rising $2,200 an ounce?

Gold prices have been battered by rising US treasury yields and a strong dollar amid optimism in the market regarding economic recovery. Comments by Fed chairman Jerome Powell in the recent past have also lent further support to the dollar and yields. Various events and data points have triggered the market volatility in the past couple of weeks like the 1.9 trillion COVID stimulus package being passed, around $2 trillion infra package proposed by the Biden administration, ETF outflow, increased tussle between US and China, central banks' comments, COVID cases rising significantly and the vaccine updates. All these have and will continue to keep the market participants anxious.

As mentioned above, there are definitely certain developments since the start of the year which have weighed on the prices and impacted the overall sentiment. Although, with the negative factors, we also cannot overlook the positive fundamentals that have been supporting metal prices till now. With macro-economic factors like the US-China trade war, geopolitical tensions and a few others; central banks' dovish stance and continuous liquidity injections to support the economy and combat against the COVID-19 is building up a 'spillover effect' story globally.

Stimulus packages are creating optimism regarding global economic recovery, though they are also creating a huge amount of debt and supporting inflationary expectations. Gold being a hedge against inflation and a rising economy burdened with debt, this scenario has created a strong floor for the metal prices.

Rising COVID cases are still a worry in the market, though vaccination drive is reducing the fear. Trade tensions and other geopolitical tensions are gradually setting up the stage. Hence, apart from economic data points, the spread and impact of coronavirus, central banks comments and actions, comments from Biden administration regarding further liquidity measures, volatility in yields and US dollar will be very important to watch out for.

Keeping all the variables in mind, investors are advised to maintain a cautious approach, as gold could trade with a sideways to negative view for short-term perspective though, some reversals could be seen at important support zones, which should be taken as a buying opportunity to accumulate from a medium-term perspective.

Now with that backdrop, the bigger question is where they are headed for the next year. Precious metals seem to be hovering close to investable levels and one should be looking to accumulate them for a 20-25 percent upside over the next 12-18 months.

Gold could be targeting towards $2,000 an ounce by the end of 2021 and eventually towards a new life-high over $2,250, while on the domestic front, Rs 50,500 followed by Rs 56,500 could be the potential upside.

What do the rising US bond yields and dollar index mean for the commodities market?

In the recent past, US treasuries have rallied on prospects of a faster recovery in the US economy and that has reflected in the dollar index as well. The dollar has rallied from levels of 90 to 93 since the start of this year and that has capped gains for major commodities. But this year we are likely to witness a different scenario as commodities with different nature are expected to react differently. Precious metals have underperformed as the dollar continued to strengthen against its major crosses. Base metals, on the other hand, are expected to get a boost on expectations of an infrastructure package that could be released by the new US president. Crude oil has rallied on the back of the supply cut announcement from OPEC but slower demand recovery could restrict major upside for the commodity.

What is your reading of base metals in FY21 and what could be the trend for FY22?

Metals have seen a phenomenal rally with price gains ranging from 35 percent or 60 percent from the lows of March 2020. We reckon that from here on, it will be a selective rally in the metals space. With some new production likely to be coming on stream over the next few months and fill the supply gaps which could cap gains for some metals.

Copper came close to a lifetime high but missed it narrowly. Given the global scenario of lower inventories, enhanced usage in electric vehicles, charging stations, global solar push and upgradation in 5G telecom technology along with infra development is likely to keep the prices elevated. We expect that in the next runup, copper could surge to new life highs of over $10,500. Indian prices for copper could reach as high as Rs 750-760 per kg.

Nickel could be the next best in the metals space with lower inventories and rising demand for EVs and charging stations along with continued demand in the stainless-steel sector, which has been a key driver over the last couple of years. We expect nickel to largely benefit from global stimulus along with more focus on green technologies. We expect nickel to surpass $20,000 towards $22,000 over the next 12 months, which is a 30 percent gains from current prices. The same would translate close to Rs 1,550 per kg levels in India.

The rupee has been in the 72.50-73.50 range against the dollar in FY21. Will the currency remain in the range in FY22 as well?

The rupee has appreciated against the US dollar last year on the back of robust fund flows in India. FIIs continued to remain net buyers in the equity segment and the financial year (FY21) ended with a net buying figure. The total inflow in the equity segment for the financial year stood at $36.50 billion, thereby supporting the rupee at lower levels. In the recent past volatility has risen but it has been driven more by global factors than by domestic factors. For this year, we expect that volatility for the currency will be curbed by active RBI intervention. With foreign exchange reserves close to all-time highs of $580 billion, the central bank has created a buffer if uncertainty increases on the back of a surge in US treasury yields as that could increase expectations of rate hike prospects in the US.

At the same time, RBI policies will also be important to drive the currency and we expect that in the latter half of this year, a change in stance by the central bank will increase volatility. Broadly, we expect the USDINR (Spot) to quote with a positive bias and in the range of 71.50 and 75.50.

Which are the key factors to look at in FY22 with respect to the commodities mentioned above?

Commodity markets are on a roll with unprecedented monetary and fiscal stimulus measures across the world and especially in the US, which drove down the cost of money and flooded markets with liquidity. This phenomenon means three things for the commodity markets. Number one is the expectations of a revival in the demand cycle which leads to larger consumption of commodities, second is that it is cheaper to own and store commodities as the interest rates are lower so inventories will pile up despite an increase in supply or not, and third is the depreciation of fiat currencies due to the increased inflationary expectations and printing of money and fiscal slippages, which means rising commodity prices in those currencies.

Gold may continue to be positive but it has largely discounted much of the inflation, now it needs to be seen how fast inflation flares up, which would determine the move in bullions.

Metals, as discussed, have had a bull run but there will be selective move going further with new-age technology like EVs, solar, 5G and news infra likely to drive prices, which is likely to be beneficial for steel, copper and Nickel.

Crude. after the rally, could take a breather in the short term but positives are likely to outweigh the negatives in the medium term and could continue to lend support.

Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
Sunil Shankar Matkar
first published: Apr 6, 2021 12:59 pm

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