Hard times ahead as global economies expected to contract further

By Naveen Mathur (Head, Angel Commdities)
Global financial markets have faced the brunt of the economic slowdown and the IMF expects global growth to contract by ½ to 1% in 2009. Industrial activity has been affected and demand for industrial metals has been hit badly. The year 2008 was very volatile as the first-half witnessed a gain in commodity prices followed by a slump in the second-half. However, commodities have started 2009 on an upbeat note as expectations of the impact of stimulus packages have provided support. Prices have also risen on the back of technically driven rallies and short-covering. The impact of production cutbacks on prices has not been witnessed as yet as the demand situation is grim. But by the end of this year we could see a recovery in prices as demand could slightly improve and the already taken production cutbacks will show their impact.
Amid all this global financial turmoil, gold has performed phenomenally as it is the most traditional form of investment and considered as a safe-haven asset. Base metal prices have also gained on the back of short-covering rallies and anticipation of buying activity due to re-weighting of some commodity indices, during the first half of January. Therefore, the reason for the rise in base metal prices in 2009 has nothing to do with the improvement in fundamentals. Hence, we feel that the gains that were made in the short-term may be given back as fast as they were achieved. Though there are indications of a pick-up in demand from China for re-stocking, the overall improvement may not happen soon and we expect a revival and recovery in prices in 2HCY2009. This recovery in prices could be fuelled by a pick up in demand from Asia, especially China, as the country implements its $586-billion stimulus package that is aimed at infrastructure development. On the other hand, the supply side will also play a major role in pushing prices higher as cutbacks have been widespread, fast and large in scale. Markets have not yet responded to the impact of cutbacks but could feel the effects in full swing by 2HCY2009. The extensive production cuts could help boost sentiments and push prices higher.
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(source: Financial Express)