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Thursday, Mar 10, 2005

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Commodity prices booming on speculative interests

G. Chandrashekhar

Mumbai , March 9

EVER wondered why commodity markets are booming and prices are on the rise? This is because the markets are now being driven by heightened speculative interest with the overall net long position rising to its highest level since June 6, 2004.

Why has speculative interest returned to the commodities complex? According to Barclays Capital, the combination of robust economic growth, particularly in the US and China, and ongoing pressure against the dollar has encouraged fresh buying interest and has pushed commodity prices back towards peak levels. The total net long position in commodities now stands at eight-month high.

While there is a modest increase in net length across the US crude oil and refined products futures, speculative interest has notably increased across the base metals complex.

Across precious metals, only gold sees increased fresh buying.

As evidence of increased fund buying boosting commodity prices to fresh highs, a research report pointed out that in the US, the total fund position in all CFTC reported commodities has surged from net short position of nearly 100,000 lots on February 13 by about 450,000 lots in three weeks by March 1.

This is said to be the second largest three-week change in the total CFTC net position since October 1997. The Barclays report went on to caution that given these rapid gains, a profit-taking price correction appeared increasingly likely, although fund length was still 45 per cent below the peak length seen on March 23 last.

Apart from the energy complex that has been rising, agri-commodities in the limelight with double-digit price growth in the last month include coffee, cotton, wheat and the soya complex (bean, meal and oil).

On NYBoT, coffee prices rose from $1.05 per pound early February to $1.22/lb on March 5, while cotton prices increased from 44 cents a pound to 51 cents/lb during the corresponding period. On the CBOT, wheat prices are up 14 per cent and soyabean and products up 20-23 per cent.

Indian market has largely followed the international trend.

In case of commodities with a high index of integration with global markets (for instance bullion), prices have moved virtually in tandem. In agri-goods such as cotton and soyabean oil, the price rise here has been less dramatic but robust nonetheless, largely tracking overseas markets.

No wonder, the current bullish trend has attracted large fund flow into commodity markets.

At present, securities and commodities markets both seem to be drawing almost equal attention, although the latter has some catching up to do. Overseas investors too have begun to watch the Indian commodity bourses.

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