'Commodity slump continues as demand concerns overshadow supply risks'

While the demand outlook remains bleak, supply concerns are also picking up as restrictions hit operations.

March 25, 2020 / 09:10 AM IST

Ravindra Rao

Commodities traded largely higher on March 24 amid a relief rally triggered by correction in the US dollar index after the Fed announced fresh aggressive measures to support its economy and financial markets.

The Fed and central banks across the globe have infused huge liquidity in the last few days to minimise the economic impact of the virus outbreak. Governments are also taking fiscal measures to complement easing measures.

While governments are taking all possible measures, market players remain unconvinced as the virus outbreak remains out of control, threatening to have a severe impact on global growth and thereby demand for commodities.

The International Monetary Fund believes that the coronavirus pandemic will cause a global recession in 2020 that could be worse than the one triggered by the global financial crisis of 2008-09.


The World Bank is also expecting a global recession and has called upon policymakers to take coordinated steps. Economic indicators also reflect the impact of virus outbreak. German and Japan manufacturing PMI released on March 24 showed a sharp drop. US jobless claims rose sharply last week and further surge is expected in coming weeks.

While the demand outlook remains bleak, supply concerns are also picking up as virus related restrictions affect operations. Newmont, the world’s largest gold miner, has placed four of its operations in Argentina, Peru and Canada into temporary care and maintenance as part of global efforts to contain the Covid-19 pandemic.

As per a Financial Times reports, in Peru, which accounts for 12 percent of global copper production, a 15-day national quarantine has brought its mining industry almost to a standstill, while Codelco, the world’s biggest producer of the metal, has reduced operations in Chile.

South Africa’s mining sector will go into three-week hibernation from March 26 in terms of President Cyril Ramaphosa’s dramatic lock-down announcement this week. South Africa accounts for 75 percent of the world's platinum and 38 percent of palladium supply, as per Bloomberg estimates.

State oil company Petroleos de Venezuela reported that at least two cargoes of Venezuelan crude have been delayed due to health inspections aboard tankers meant to prevent the spread of the coronavirus.

Overall, commodities markets continue to stare at challenging times. The longer it takes to control the virus, the greater will be the demand impact, however, it is unlikely that supply may remain unaffected. In such a scenario, it is likely that we may see some stability in commodities with tighter supply.

(The author is VP- Head Commodity Research at Kotak Securities.)

Disclaimer: The views and investment tips expressed by investment expert on Moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
Moneycontrol Contributor
first published: Mar 25, 2020 09:10 am

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