EUR 8.70 For Business Accounts Only

Oct'17_Commodity cycle on an uptrend

Continuing its recent ascent, global commodities index (TRJ-CRB Index up 2.4%MoM) further recovered in Oct'17, marking the second consecutive monthly rise. In this regard, energy prices particularly Oil encountered the most profound impact with prices for Brent and Arablight rising by 3.8%MoM and 4.1%MoM respectively, on falling US rig count (to 737 from 750 in Sep'17), depleting inventory levels (11,000 bbls) and potential extension of production cuts in Nov's OPEC meeting. Mimicking oil price uptrend, related commodities also depicted strength with coal prices leading the pack, (+3.0%MoM on supply disruptions amid higher demand), followed on by urea (+9%MoM on higher demand from India), while steel prices ended flat. Dairy prices, however took a breather (FAO dairy index down 4.2%MoM) on account of lower demand amid ample intervention stock in  EU favoring the downtrend. While recovery in the commodity cycle has been encouraging, we feel sustenance of the same remains contingent on improving demand scenario. Moving ahead, oil prices are likely to determine the trend in commodity prices where OPEC's Nov'17 meet presents significant tailwinds for bullish sentiment in crude.

Oil prices touch US$61/bbl in Oct'17: Falling US rig count (to 737 from 750 in Sep'17) and depleting inventory levels (11,000 bbls) have pushed Oil prices higher, with WTI/Brent/Arab lite up 3.92/3.84/4.07% over the previous month. As oil re-enters the phase of balanced markets, geopolitical news now have deeper impacts over the short run price movements. Early October saw fears of tropical storm Nate easing, but higher output from the shale producers kept oil in check. The next few days largely altered the route, where Saudi prince's declaration to cut exports by 7% (~0.56mn bbls) and Trumps refusal to certify Iran's nuclear deal pushed WTI above US$51/bbl levels. While concerns over Kurdish territory rifts surfaced for a while (reducing the supply of ~0.2mn bbls from the market), they were largely muted by higher output by the US producers taking advantage of lower Oil Field Services. Prices rallied during the last week of October, fueled by news of OPEC, Non-OPEC compliance level in Sep'17 reaching 120% and re-iteration by Saudi to possibly extend the cuts. Brent closed above US$60/bbl after a wait of 27-months while World Bank has forecasted average Oil prices at US$56/bbl for 2018. Local refiners' energy spreads moved north during the month while benefitting from higher prices in the form of inventory gains. Investors look forward to OPEC's next meeting in Vienna on  Nov 30'17 for a possible extension in the agreed cuts where other countries (Turkmenistan etc.) are also expected to participate.

Urea prices rebound to avg. at US$278/ton in Oct'17: Urea prices continued its upward momentum in Oct'17 as well, rising +9%MoM/+35%YoY to stand at an average of US$278/ton vs. US$256/ton in Sept'17. After breaking its 14yr low (US$181/ton in Jul'17), urea prices bounced back strongly (gained 59% to date), driven by outages and seasonal maintenance, combined with higher demand from India. At the same time, lower inventory stock also helped drive prices higher. Having said that, outlook for urea prices remains soft going forward, where supply is expected to return to normal levels with new capacity coming online (7.2mn tons of urea capacity scheduled to come online in 4QCY17). On the domestic front, rising trend in the int'l urea prices helped local manufactures to export the remaining allocated quota of urea at higher prices while easing down inventory levels at the same time (urea inventory came down significantly in Sept'17 by 53%YoY to 733k tons).

Coal sustaining at high levels: Global thermal coal prices are experiencing their third spike in the last year and a half due to supply constraints from Chinese and Australian mines. Currently standing at its 12 month high of US$94/mt (vs. previous high of US$99/mt in Nov'16), thermal coal went up by +3%MoM/+2%YoY in Oct'17, to stand at an average of US$91/mt. Strong performance in thermal coal price is being driven by market dynamics in China (increased appetite for imported coal) and Australia (weather-related disruptions). A crackdown on illegal mining and pollution in China has curbed domestic coal supplies while heatwave and lower hydro power output lifted demand for coal in power generation, taking prices higher.

Steel prices remain flat: Steel prices remained flat in Oct'17 (CRC/HRC: -0.4%MoM/-1.1%MoM), as importers from GCC, Iran and EU stopped buying over expectations of decline in steel prices, leading to limited trading activity. Also, tepid Chinese domestic steel demand kept steel prices under pressure. Going forward, we expect steel prices to remain range-bound, as construction season ends in a number of European countries. Moreover, recent weakness in Chinese steel demand would continue to weigh on steel prices.

Cotton prices witness mix trend: After remaining stable in Sep'17(+2%MoM), international cotton prices witnessed slight correction (down 3%MoM, at an average of USc78.51/lbs) in Oct'17, as the USDA released its MY18 cotton production estimates, highlighting limited damage to the US cotton crop from Hurricanes. As per recent USDA's report, the global cotton production/consumption estimates for MY18 have been revised upward by 112k/262k bales to 120.9mn/118mn bales, leaving production surplus of 2.9mn bales.  With bumper cotton production in countries like India, Australia and United States, cotton prices are expected to soften further going forward. However, there is possibility that China could absorb some of this additional supply by increasing imports. Contrary to the int. cotton price trend, domestic cotton prices moved up in the latter half of Oct'17. With smog impacting the quality of Punjab's cotton crop, local spinners rushed to stock early harvested cotton, which resulted in surge in local cotton prices. We expect this trend to continue in the short run until smog infected crop enters the market.

FAO Dairy index is down 4%MoM: Averaging 214.8 points in Oct'17, the FAO dairy index was down 4.2%MoM, however on a YoY basis, the index was up 17.5%. Marking the first drop since May'17, this reversal in trend is primarily on account of lower demand amid ample intervention stock in EU leading to the price decline for powdered milk.