Why Commodities Prices are Rising

India's commodity market is experiencing a period of intense price surges. This isn't just a whisper - it's a roar, evident in gold and silver prices repeatedly brushing shoulders with record highs.

The Multi Commodity Exchange (MCX) witnessed gold futures contracts for June 2024 skyrocket to a staggering Rs 71,057 per 10 gm, while silver prices mirrored the trend, peaking at a record Rs 81,955 per kg within minutes of the market opening.

Adding to the fervour, oil prices have been trading around US$ 90 per barrel this week, with expectations of further increases on the horizon.

But what's fueling this fiery escalation?

Let's delve into the reasons behind this perfect storm brewing in the Indian commodity market.

#1 Weak Rupee

The Indian rupee's recent plunge to all-time lows of 83.5 against the US dollar, propelled by a robust dollar and significant foreign institutional investor (FII) outflows, has set the stage for a surge in commodity prices.

This depreciation of the rupee makes imports, particularly of commodities like crude oil, gold, and essential metals such as steel, copper, and zinc, considerably more expensive for India.

Consequently, the domestic prices of these commodities are witnessing a notable uptick, exacerbating inflationary pressures within the economy.

Moreover, the weakening of the Chinese Yuan, down by 2% in 2024 due to expectations of monetary easing, further intensifies the strain on the rupee.

As China is a major player in the global commodities market, a depreciating Yuan can drive up prices of metals like steel, copper, and zinc, along with precious metals like gold and silver.

The continued strength of the US dollar, driven by safe-haven demand amid geopolitical tensions, and hawkish statements from Federal Reserve officials, adds another layer of pressure on the rupee.

#2 Global Rate Volatility

The anticipation of a possible interest rate cut by the US Federal Reserve has significant implications for commodity prices in India.

A potential interest rate cut by the Federal Reserve can weaken the US dollar as lower interest rates make the currency less attractive to investors seeking higher returns.

A weaker US dollar can drive up the prices of commodities globally, as they are primarily priced in dollars.

This increase in global commodity prices translates into higher import costs for India, contributing to inflationary pressures domestically.

Additionally, positive US economic data, such as better-than-expected non-farm payroll data and anticipation of positive Consumer Price Index (CPI) data, has bolstered market sentiment and fueled expectations of a rate cut.

This sentiment has driven investors towards commodities as a hedge against potential inflationary pressures resulting from the rate cut, further increasing demand and pushing up prices.

Lastly, any increase in global commodity prices due to expectations of a Federal Reserve rate cut will have a direct impact on commodity prices in India.

Commodities such as crude oil, metals, and agricultural products, which are heavily traded in international markets, will see price increases, leading to higher import costs for India and contributing to inflationary pressures domestically.

#3 Rising fuel prices

The surge in fuel prices globally, driven by geopolitical tensions and supply disruptions, has significant repercussions for commodity prices in India.

The ongoing conflict between Iran and Israel, coupled with disturbances caused by the Houthis in the Red Sea, has led to delays in crude oil shipments, exacerbating supply chain challenges.

Furthermore, the Russia-Ukraine war has disrupted oil supplies in Europe and beyond, with sanctions impeding Russian cargoes.

Despite these disruptions, the Organisation of Petroleum Exporting Countries and its allies (OPEC+) have opted to maintain their supply policy unchanged until mid-2024.

Additionally, the price cap on Russian oil has compelled Moscow to sell at reduced rates, prompting a re-evaluation of its supply strategy.

In India, a net importer of crude oil, these developments translate into heightened import costs, resulting in increased prices for petroleum products domestically.

This upsurge in fuel expenses not only elevates transportation costs but also drives up production expenses across diverse industries.

Consequently, inflationary pressures mount as businesses pass on these heightened costs to consumers, impacting their purchasing power and overall economic stability.

Moreover, industries reliant on fuel for manufacturing processes experience heightened production expenses, further contributing to the inflationary trend.

Moreover, the risk of crude oil surpassing the US$ 90 per barrel mark threatens to escalate further, potentially, surpassing US$ 100.

Such a scenario could trigger a new round of inflation in importing countries, adversely affecting anticipated demand growth.

Conclusion

As commodity prices continue to rise, certain stocks like Tata Steel, Coal India, Hindustan Copper, and NMDC are benefitting from this upward trend.

While these companies show promising prospects for 2024, it's crucial to acknowledge that commodity prices are influenced by a multitude of factors, both domestic and international.

While investing in these stocks may offer potential rewards, it's important to recognize their volatility and sensitivity to various external factors such as geopolitical tensions, supply chain disruptions, and unexpected market fluctuations.

Therefore, investing in commodity stocks requires a thorough understanding of market dynamics and risk tolerance.

To address the challenges posed by rising commodity prices, the government is undertaking several measures.

These include adjusting import/export policies, implementing price controls, and encouraging domestic production to mitigate reliance on imports.

Additionally, efforts to enhance supply chain efficiency and promote alternative energy sources may also help alleviate the pressure on commodity prices.

Given the uncertainties surrounding commodity markets, investors should diversify their portfolios to spread out risks associated with volatile assets.

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Learn more about our recommendation services?here...