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Trends in commodity prices and rules of trade

Source: Financial Express, November 5, 2019

There is a distinct shift from coal to natural gas for electricity generation in advanced countries and India also must enhance the availability of natural gas for increasingly higher use by steel plants to reduce carbon emission.

In general, the movement of commodity prices depends on the demand of the finished goods which it serves as raw material. However, there are a plenty of external factors, natural or political, that disrupt this linkage quite often. For instance, flash floods in Australian coal mines, terrorist attack on Aramco oil infrastructure in Saudi Arabia, blast in Rio Tinto mines in Brazil as well as specific government policies on environment externalities like the recent Chinese policy on reducing coal consumption to improve environment cleanliness can cause wide fluctuations and uncertainty in global commodity prices in coal, oil and iron ore.

While predicting these factors, being difficult to predict, weigh in favour of continuing with minor changes in the current level of prices at least for the coming few months. This pattern is apparent in the report released by World Bank on commodity prices. The current average crude oil price at $60/bbl is predicted to drop to $58/bbl in 2020 before rising to a gradual climb up to $70 by 2030. The subdued demand from the user segments (around 1% per annum) supported by emergence of electric vehicles, the substitution by shale gas and production capabilities by Opec countries, the US, Russia, Indonesia, Nigeria are ensuring adequate supply in the coming years. Almost similar factors are at play in respect of coal which is facing the challenge from cleaner fuels like natural gas. It has been rightly established that prices of substitute products vis-à-vis the prices of major commodities like crude oil and coal has a major influence on demand of commodities. The average coal prices (coking and non-coking) is likely to move down from the current $79/mt to $71/mt in 2020 and further going down to $60/mt by 2030. This is expected as the increasing concern of energy efficiency and carbon emission has already cut down the demand for coal.

There is a distinct shift from coal to natural gas for electricity generation in advanced countries and India also must enhance the availability of natural gas for increasingly higher use by steel plants to reduce carbon emission. The lower price forecast for coal is good news for steel industry. It would have downward impact on landed cost of coking coal as well as domestic prices of coking and non-coking coal. Coal production by China is likely to go down and supplies are to be maintained by the US, Indonesia, Australia, India and Russia. Natural gas prices at current level of $2.7/mmbtu is likely to be near stagnant till 2022 before rising up to $4/mmbtu by 2030.
Under the metal category, the average iron ore prices is projected to drop down significantly from the current level at $92.2/dmt to $81.3/dmt next year and continuously lowering down to $70 by 2030. Australia, Brazil, India, China and Russia would continue to dominate the world availability of iron ore. It is expected that Indian iron ore mines where leases are going to expire by March, 2020 are permitted by the government to continue operations or alternatively these are put on fresh bidding in order to eliminate the possibility of sudden supply shortage in the domestic market.

The aluminium prices have been projected to rise by around 23% by 2030 from the current level of $1,790/mt with marginally falling by $30/mt in the next year. The average price of nickel, the major input for stainless steel, is likely to move up from the present level of $14,140/mt by 27% by 2030. The average price of copper would gradually rise by 16.5% from the current level of $6,010/mt in the next 11 years. However, steel industry would be happy to know that average zinc price has been projected to go down to $2500/mt by 2030 from the present level of $2570/mt and the heaviest drop in price of Zinc (by 5%) may happen in 2020.
These projections of commodity prices may help Indian steel industry to work out strategies for growth in the next 2-3 years. The stable and marginally downward forecasts made for the average global prices of crude oil, coal, iron ore, aluminium, nickel and zinc are strong signals for achieving a reasonably remunerative spread for the finished steel prices in 2019 and 2020.

Last week, the High Level Advisory Group (HLAG) report on Trade constituted by ministry of commerce has been released that contains some straight talks on the trade performance by India since the beginning of the twenty first century and has come out with some pragmatic and effective recommendations for the domestic export players, specifically in sectors like agriculture, pharmaceuticals, textile, tourism and hospitality, electronics, among others. It talks of a change in the mindset of all the stakeholders to fully appreciate the benefits of global trade, to participate in the global value chain in order to improve the competitiveness of our own industry, agriculture, manufacturing and service sectors.

Regarding FTAs and RCEPs, the two most disrupting elements for growth and survival for Indian steel industry, it has been rightly mentioned in the report that adequate and comprehensive studies on the participating countries, both tariff and non-tariff barriers, a thorough analysis of their political systems, the internal regulations, environment regulations, standards, labour laws and business culture must precede the initiation of trade negotiations. There has to be a proper institutional mechanism to address the concerns of the domestic industry by implementing an effective and immediate trade measure. The market access to India must be matched with adequate market access to the partnering countries. Hopefully, these recommendations would be considered in the latest RCEP engagement by India.

News Source: Financial express