Commodities At Crossroads

Nearly four months past 2020, most of the commodity prices have declined sharply on account of
rising concerns of deflation; barring a few like Gold and Silver. The demand and supply scenarios for
most of the commodities globally have reached to a huge disequilibrium state.
With the current global pandemic and lockdown situation, we think the worst perhaps is not over
yet; but believe that the world has got into an inflection phase where the rebalancing is starting to
happen with recovery in China, huge financial stimulus in the West and of course historic decline in
the world oil price. However, we are not so sure about the time period it can take to reach a phase
where we can securely claim that the bottom has been formed. This might be possible to project
once the current pandemic situation, lockdown recedes completely and world comes back to its pre
-crisis motion.
Within commodities let us look at few important sectors, their demand-supply scenarios and likely
The OPEC+ production cut effort is seen inadequate. Oil is likely to test global storage capacity in
next few weeks. This may likely create substantial volatility in the prices with more spikes to the
downside until supply and demand comes to an equilibrium.
As per market report by mid-May global oil demand losses are expected to be 18 million barrel per
day, suggesting a near equal amount of supply will need to be shut-down. We think oil prices may
remain under stress in entire May or may be in June. However, thereafter any modest recovery in
demand might put the market into deficit because supply cut cannot be just undone very quickly.
Nonetheless, such a deficit doesn't argue for a quick recovery in prices, only a flattening of the curve
likely near $30/Barrel for few months while price rally will be seen with inventory level reduces with
a potential tight market in 2021.
Trade perspective - Oil prices are at a multi-year low and thus we have not done any directional
trade here. The volatility in Oil prices offered many opportunities as the spreads are higher and
remain so than historic levels. We have booked profits on Calendar spread trades in Oil. Once we
have better clarity on the economy revival, we would look at tactical directional trades as Oil is a
value buy at these low prices.
Current Fund Strategy: Calendar Spread

In the current environment the only asset that has been outperforming the rest in the whole world is
Gold while silver is trying to follow the suit. However, prices of other commodities have declined
sharply causing a concern of deflation; raising a question whether gold which is near all-time highs in
US dollars and at all-time highs in most other major currencies has run its course, will likely continue
to gain in the short to medium term.
The global gold price is currently hovering around $1700/Toz and believe the run up could push price
to its previous highs in USD terms. With the current corona crisis making supply side disruptions,
government stimulus and inferior performance of peer financial assets may continue to support gold
price. In the domestic market ( India), gold price is at a new life time high trading near Rs. 48,000 to
49,000 per 10 grams and likely that it may continue to rise in the near future. The local currency
depreciation against the US dollar has been another factor supporting gold price rise. In fact with
Indian rupee trading near 76-77 per one USD and global gold price reaching to $1850-1900, the
domestic gold price might go beyond 52 to 53,000 per 10grams in the medium term.
Trade Perspective - Under Gold we successfully carried out tactical directional trades and spotted
opportunities in Arbitrage trade as well as Calendar Spread trades. In fact, with decent spreads
available we could clock a Calendar spread trade and not get into delivery under an Arbitrage trade.
We believe that tactical directional trades hold better risk adjusted opportunities rather than
constantly being long on Gold as Gold is trading at a life-time high and not much clarity exists on the
economic recovery
Current Fund strategy: Arbitrage, Calendar Spread and Tactical Directional trades

In case of Silver, currently it is underperforming gold while taking cues from other metals and thus
hovering around 15USD/Toz. The global read ratio of Gold/Silver which typically determines the
comparative performance of two asset classes is hovering around 115, near its life high. However,
we think any gradual signs of improvement in the manufacturing sector globally will quickly push
silver price higher. Hence it remains another attractive avenue for investing in the long run. The
current historic ratio above 110-115 looks highly irrational and we think it may soon see a mean
reversion. In Indian terms, Silver price which is currently trading around Rs. 43,000 per Kg may
remain range bound in the medium term.
Trade perspective - As Silver has more industrial use, we have avoided any kind of directional trade
on this precious metal and have booked only Calendar Spread trades. However, looking at the
current irrational Gold Silver ratio, we might start to look at tactical directional trade
Current Fund strategy: Calendar Spread

Copper & Aluminium
In the past four months no metals have been immune to global pandemic. With fear of demand cut
down, the entire sector has declined massively. However, we think once the situation normalises to
an extent, both demand and supply recoveries are likely to be more V-shaped. This could create
more short term downside risk to asset price as the recovery in supply will likely be faster than the
recovery in demand. However, looking further out, given the emphasis on construction,
infrastructure and manufacturing globally, metals are also posed for a quicker, more sustainable
recovery. Further, capex commodities will likely be well-supported by a Chinese ‘infra rush,’ with
infrastructure showing the best sequential improvement across all sectors. This is consistent with
the Chinese government’s focus on infrastructure stimulus post-lockdown. We believe the
government has already accelerated some construction projects which were planned to happen
later this year to offset export disruption in the following two months. As per Goldman Sachs report,
for example, construction of 42 sports stadiums for the 2022 Asia Games in Hangzhou, Zhejiang
province, are now required by the government to be to completed by year end. This implies a long
position in capex commodities like iron ore and copper and a short position in opex commodities like
oil and aluminium, however, we would wait for the capex commodities to sell off first for to get an
opportunity to get into long term buy.
Though this segment has more challenges than others, current scenario is not good, going
directionally long is woring, but the volatility is giving us opportunity for calendar spread and arb.
Trade perspective - The segment of industrial metals has more challenges than others, and going
directionally long on these in the current scenario is completely avoidable. However, the volatility is
giving us opportunities for calendar spread and arbitrage trades.
Current Fund Strategy: Arbitrage, Calendar Spread

Agriculture Sector
As the global recovery gains momentum, phase one of the trade deal ( Between the US and China)
will likely come back into focus for the agriculture and livestock markets. However, now with an
altered timeline, prices down 20% and the dollar modestly stronger, the proposal looks far less
attractive to China than it did pre-crisis. Further, given China’s tendency to wait for lower prices, any
Chinese import support will likely be delayed until later this year when prices are likely to be at their
weakest point. We think agriculture commodities are expected to remain volatile in the global
market. More than the global demand and supply scenario, India will play a major role with
monsoon season ahead in few months. The Indian Meteorological Department (IMD) has projected a
preliminary forecast of normal monsoon but the current lockdown has damaged farmers’ confidence
with huge loss, harvesting of crops are delaying and few pockets of unseasonal rainfall with
hailstorm causing crop damage.

Some of the agricture commodities could bring in potential investment opportunities in the medium
term. Our focus will be on the select Khariff ( Summer) crop for the medium term while will get
opportunity to get into arbitrage opportunity.
Trade perspective - In India, summer crop or Kharif season will soon begin and Monsoons will set
soon too. We are focussing on Arbitrage opportunities in select commodities like Cotton and Soya
bean. Season beginnings are good times for buying agricultural commodities and holding the same
for 3-5 months. However, this will on very select commodities where the risk reward ratio is
extremely favourable.
Current Fund Strategy: Arbitrage and Directional Trades on select commodities
Current strategy is subject to change without prior notice.

Disclaimer: The views expressed in this article are personal in nature and in is no way trying to predict the markets or to time them.
The views expressed are for information purpose only and do not construe to be any investment, legal or taxation advice. Any
action taken by you on the basis of the information contained herein is your responsibility alone and Tata Asset Management will
not be liable in any manner for the consequences of such action taken by you. Please consult your Financial/Investment Adviser
before investing. The views expressed in this article may not reflect in the scheme portfolios of Tata Mutual Fund. This is for
information only and is not to be considered as sales literature. Not to be used for solicitation of business in schemes of Tata
Mutual Fund.

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