Market Update

Tuesday, 20 December 2016

Best Advisory Company Advice Not gold or silver: Look which commodities beat equity in 2016


Best Advisory Company | Equity Market Tips

Commodities outpaced domestic equities in 2016, as crude oil, precious metals, base metals and agricultural commodities delivered over 20 per cent return on an average against tepid gains in the domestic equity indices.

During the year, the BSE Sensex and NSE Nifty have advanced nearly 1.50 per cent each till date.

Base Metals

Among the commodities available for trading on the domestic bourses, zinc has gained the most at 70 per cent since the beginning of this calendar year till December 16. Prices of the metal rose from Rs 106 a kg to nearly Rs 185 a kg till date. Other base metals - copper, aluminium and lead - advanced 24 per cent, 28 per cent and 17 per cent, respectively, during the year.

Most of the base metals witnessed an amazing rally during November, as all of them have been beneficiaries of robust manufacturing activity in major consumer nations, namely the US, China and the EU.

Also, a commitment by US President-elect Donald Trump to increase infrastructure spending is widely expected to spur growth and inflation.

Supply constraints and a decline in inventories also spurred base metal prices higher. Recently China's top economic commission approved a $36 billion plan on new rail links around Beijing, boosting demand for industrial raw materials.

Prathamesh Mallya, Senior Research Analyst for Commodities & Currencies at Angel Broking, said: "The rise in base metal prices was attributed to an assurance by US President-elect Donald Trump that he would cut taxes and invest more than $500 billion on infrastructure, the core demand area for base metals."

Gold & silver
Precious metals on an average gained nearly 14 per cent during the year. Gold underperformed other precious metal and gained nearly 9 per cent to Rs 27,239 per 10 gm as of December 16, 2016 compared with Rs 24,967 per 10 gm in December last year, whereas silver surged nearly 19 per cent during the year. The white metal has rallied to Rs 39,590 per 1 kg from Rs 33,360 in last 12 months.
On gold and silver price movement,  Madhavi Mehta, Analyst at Kotak Commodity Services, said: "Gold failed to outperform silver in 2016 due to lower safe haven demand, strength in the US dollar and uncertainty over Indian demand. On the other hand, most industrial metals are trading near multi-month highs amid improved risk sentiment and demand expectations."

Silver is primarily used in industries that make solar panels and cellphones, among others.

Agricultural commodities

In the agricultural space, wheat, jeera and turmeric prices climbed nearly 24 per cent, 23 per cent and 22 per cent, respectively. Coriander and chilli prices slipped 23 per cent and 17 per cent in 2016 till date.
On impressive returns given by wheat, Subhranil Dey, Senior Research Analyst (Commodities-Fundamental), SMC Comtrade, said: "The commodity touched an all-time high of Rs 2,175 per quintal on the national bourse in 2016, buoyed by fundamental factors such as tight supply and consistent demand. In the spot market, wheat prices have surged to Rs 2,100-2,150 per quintal in northern states from Rs 1,600 at the beginning of the last rabi season."
To cool off wheat prices, the government lowered wheat import duty in September to 10 per cent from 25 per cent and then exempted wheat from import duty levy altogether. India's annual consumption of wheat is of 87 million tonnes, whereas production stands at around 93.50 million tonnes.

At present, the country is consuming the wheat grown during crop year 2015-16 and the new crop is expected to arrive April.

Other agro-commodities such as cotton, sugar and pepper gained 15 per cent, 14 per cent and 9 per cent, respectively.

Prices of soybean tumbled nearly 19 per cent this calendar year to Rs 3,030 as of December 16 from Rs 3,743 per quintal in December last year.

India is the sixth largest producer of soybean in the world and it is mainly dependant on monsoon rains. After two consecutive years of weak monsoon, normal and above-normal rainfall in 2016, particularly during the peak planting season of June-mid-July, encouraged planting of the oilseed.

"Indian growing conditions during last year's cropping season were largely categorised as normal and soybean production in most growing areas was largely unaffected by adverse weather," said Dey.

Crude oil

 

Crude oil has surged 40 per cent since the beginning of ongoing calendar year. Prices of the black gold hit nearly 17-month high recently after Goldman Sachs boosted its price forecast for 2017 and producers showed signs of adhering to a global deal to cut output.
Since the beginning of December, crude prices have jumped over 5 per cent after the Organisation of Petroleum Exporting Countries (Opec) agreed to cut output by 1.2 million barrels a day (bpd) for six months from January 1, with top exporter Saudi Arabia cutting it by around 4,86,000 bpd.
On December 10, non-Opec producers, including Russia, agreed to reduce output by 5.58 lakh bpd, short of the initial target of 6 lakh bpd but still the largest-ever contribution by non-Opec nations.

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