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Last Updated : Sep 28, 2019 10:41 AM IST | Source: Moneycontrol.com

Look at 4 pillars of commodities to gauge strength of the economy

Among the 30 period moving correlations between Iron ore – Crude oil to Crude oil – Copper, the former acts as a leading indicator in the economy and in the period of low/nil correlation crude moves against the trend of other two.

Moneycontrol Contributor @moneycontrolcom

Ramesh Varakhedkar

If one should desire to know whether a kingdom is well governed, if its morals are good or bad, the quality of its music will furnish the answer: Confucius

Connecting the quote to economical aspect in modern times, one should desire to look at where the top traded commodities are standing at a given point of time, to decide upon the governance of the system and strength of one’s own economy.

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Yes, one would definitely look up at crude oil (the most traded commodity across the globe), copper (inexpensive metal having a plethora of usage), iron and steel (base product to all industries) to arrive at the answer.

Also, the consumption of afore-stated commodities is looked at China and US economies as the consumption pattern of the metals shifted to East Asian Countries from Western countries in the latter half of 19th century and the percentage of consumption accounts for more than 50 percent of global production.

Image42792019Among the 30 period moving correlations between Iron ore – Crude oil to Crude oil – Copper, the former acts as a leading indicator in the economy and in the period of low/nil correlation crude moves against the trend of other two.

In extreme cases, when price driving factors such as the recent drone attacks on Saudi’s Aramco oil fields, which disrupted 50 percent of the global supply; comes into picture tension surmounts among the producers of different industries across the global economies.

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Looking at the normalised curves of PPI in the ferrous sector and energy sector across the top economies viz., US and China, the interest towards the production of the ferrous components shall rise from around mid-October period making the iron & steel prices to falter from the highs made in the initial weeks. Overlapping the scenario with 30 Day correlation leaves the person with less costly copper at the end of October.

Now that upswing of production activities at Saudi Arabia is up to 75 percent of the pre-attack levels (around 3 mbpd at Abqaiq and 1.3 mbpd at Khurais plant) and well ahead of the estimated time period, the supply-side concerns will be limited and the demand aspect must be looked in to decide the correlation between the trio commodities.

Largely, the direction of movement shall react to the reforms made to the consumer aspect and less to the producer aspect.

Moving back home, the falling commodity prices amid the heightened global economic tensions shall narrow the fund flow to the producer and in the intent of allowing investment flow to these producers, reforms like corporate tax rate cuts, interest rate cuts would be a relief.

Nevertheless, these measures would accumulate benefits to the business later in the time period and not immediately. Also, if low commodity prices prevail then the road to investment would turn bleak and gradually commodities have to turn around where the prices would soar.

The technical outlook for the discussed commodities would be as follows:

Since the last three consecutive months, copper futures are trading within a confined range of Rs 430-460 per kg and in the month of October, copper futures are expected to remain in the mentioned range with positive bias.

Steel prices have started recovering after making a low of Rs 24,720/Mt in the month of August 2019. At present prices are trading around Rs 28,100. An overall bearish trend is in progress, however in the month of October prices are expected to trade within a range of Rs 26,500-30,000 with positive bias.

Crude Oil October contract delivery futures are trading around Rs 4,000 per barrel. In the month of October 2019 prices are expected to move higher towards the Rs 4,300-4,350 levels. Lower side supports are at Rs 3,800 levels.

 

The author is CEO – Commodities and Currencies at Karvy Comtrade

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.

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First Published on Sep 28, 2019 10:41 am
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