Turn of commodities! written on Aug 18, 2008 1:39 PM

date Aug 18, 2008 1:39 PM
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Turn of Commodity- to see fall/positions getting squared
Although crude oil price fell to US $112 per barrel during the week before rebounding on Friday, the Index of Industrial Production (IIP) published on Tuesday, 12 August 2008 was far from encouraging. The IIP grew at 5.4% in June 2008 well below 8.9% in June 2007 but higher than the revised figure of 4.1% for the month of May 2008. Since it fell below market expectation, it was felt that corporate margins are under pressure and it will be tough for them to maintain a high growth rate in the current inflationary situation. Fall in the prices of crude oil, gold and commodities such as coal, copper, zinc, steel, alloys and aluminium, which will have a salutary effect in days to come. Coal prices have fallen drastically and are reported to be at a 9-week low of US $156 per tonne from the peak of US $200 per tonne in July 2008. It may fall further as the disruption at the main coal port in Vietnam may be resolved shortly. This port handles most of Vietnam's coal export to China and Japan and its loading capacity fell short by 30% as its loaders had collapsed in a recent storm. With the fall in coal prices, the cement, steel, aluminium, copper and chemical industries will stand to benefit as they are high fuel (coal) intensive industries. Meanwhile the prices of copper have fallen from a high of US $8950 to US $7330 per tonne on the London Metal Exchange (LME), which is the lowest since February 2008 and represents a fall of about 18%. Thus the fall in the price of fuel and base metals will boost industrial profitability. The inflation rate, which had shot up from 7% to 12% till last week may start retreating once the effect of the reduced coal prices and commodities is felt by corporates and passed down the line to the consumers. Since the high crude prices and inflation rates had taken a toll of the stock markets in June/July 2008 to hit new lows and created a great deal of anxiety and panic among long-term investors and short-term traders, it should logically impart confidence now and lead to renewed buying.