Sharp fall in commodities unlikely unless any concrete efforts to resolve dispute

Ravindra Rao, VP - Head Commodity Research at Kotak Securities

Commodities have been on a rise for the last few days as Russia-Ukraine fighting fuelled concerns that supply from Russia may be impacted. While there has been no resolution of the dispute yet, market reaction has subsided to some extent as market players assess implication of the geopolitical development.

Russia is a major player in commodities market and increasing supply risks pushed commodities to multi-year highs and some to fresh all-time highs this week. In energy complex, WTI and Brent crude surged to 2008 highs while the European gas prices jumped to all-time highs. In industrial metals, copper, nickel, aluminium surged to record high level while zinc tested 2007 highs. Amid other commodities, palladium and wheat also surged to record high levels. Meanwhile, gold jumped to August 2020 highs amid increased safe haven demand and increasing inflation concerns.

Commodities set fresh highs this week, however, the momentum has halted as market players assessed the Russia-Ukraine situation. Prospect of a resolution rose earlier this week as an aide to the Ukraine President indicated that the country may be willing to consider Russia's neutrality demand if it gets security guarantees. Hopes of a resolution, however, waned as meeting between Russia and Ukraine foreign minister failed to result in a break through.

Commodities stalled amid signs that the US and allies may take measured approach while imposing restrictions on Russia. The US this week announced a complete ban on Russian energy exports, however, the move was largely anticipated.

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Ravindra Rao

Head - Commodity Research|Kotak Securities

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The UK announced that it will phase out crude imports from Russia over the year but did not put any restrictions on coal or natural gas. European Union, which is a major destination for Russian energy exports, however, chose to avoid any restriction on Russian exports owing to its high reliance.

The rally across commodities halted also as market players assessed the implication of higher price. A sustained rise in price will challenge demand growth. Rising energy and commodity prices, may further aggravate inflationary pressure threatening economic activity and thereby demand.

We saw some profit taking move in commodities also as market players assessed how central banks will respond to latest developments. The European Central Bank, at its monetary policy meeting this week, warned about downside risks to the economy but also announced that bond purchases may end by third quarters if economic data allows it.

The European Central Bank (ECB), however, indicated that end of bond purchases may not be immediately followed by rate hikes and any move will be gradual.

Focus is now shifting to the Fed meeting next week. Market players have reduced expectations that Fed may raise interest rate aggressively as geopolitical tensions challenge growth. However, the Fed is expected to maintain aggressive stance with inflation out of control. The latest data showed that consumer price rose 7.9 percent on the year in February, the fastest pace in 40 years.

Commodity market players were also rattled by concerns that measures may be taken to limit volatility and this may also have caused some profit taking. Nickel prices rose more than 100 percent and breached the $100,000 per tonne level on March 8 and the move forced LME to temporarily suspend trading. SHFE also suspended the trading of several nickel contracts.

Commodities rallied sharply in last few days and this has made it vulnerable to profit taking. We may see volatility continuing as market players assess demand supply implications as well as monetary policy stance of major central banks. However, supply risks are still looming large and a sharp fall may not come unless there are concrete efforts to resolve the dispute.

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