Final Rabi Crop Estimates for 2015-16

Unseasonal rain and hailstorms have once again hit the crops across North and West India but the intensity has been on the lower side. Report of marginal damage is received from localised pockets in cereals, oilseeds and pulses. The main states affected by the rains & hailstorms are Punjab, Rajasthan, Haryana, Uttar Pradesh, Maharashtra, Gujarat and Madhya Pradesh. As per the recent assessments by various agencies wheat crop has been affected in Punjab, Haryana, Uttar Pradesh and Madhya Pradesh. Apart from wheat, slight losses have also been seen in RM Seed in the states of Rajasthan, Punjab and Haryana. Reports of loss in Chana is reported from Madhya Pradesh and Rajasthan.

In my first estimate (First Rabi Crop Estimates for 2015-16 – Dated: 19^th December 2015) had already lowered the crop size for major crops over 2015-16, Owing to deficient monsoon (14 per cent on National level) and delayed sowing of Rabi crops as the kharif harvest was delayed. The situation of increased moisture stress in wheat fields in Punjab, Haryana and Uttar Pradesh got relief after light showers in 1^st and 2^nd Week of March and the crop situation has improved. Accessing the new improved scenario, I have positively revised my wheat estimate by 8.40 per cent to 83.34 million MT which, still below the last year’s estimate by 3.57 per cent. Rabi Maize total production is set to decline further by 13.92 per cent over last estimate to 4.92 million MT. The barley production in Rajasthan and other parts of the country is set to decline by 25.00 per cent over last estimate to 1.29 million MT. Overall, the total Rabi Coarse Cereals production is likely to decline by 9.47 per cent over last year to 9.99 million MT.

In the pulses sector, the Chana (Chickpea) is expected to be most affected by the lack of residual soil moisture in major growing areas and the recent hailstorms in several pockets of Rajasthan. I expect the production of Chana to decline by 23.24 per cent to 6.24 million MT over last estimate. Overall, the total Rabi Pulses production is likely to decline by 14.55 per cent over last year to 9.89 million MT.

The oil seed sector is likely to see an improvement in production by 3.72 per cent to 8.66 million MT keeping the total rabi oil seed supply at the same levels as last year.

Based on the above reports and feedback from the Industry / Traders I have revised my Rabi crop estimates for upcoming season as:

Copper Recovered Partially in Absence of Immediate Threats to Global Economies

Since, last couple of years the copper market has been marred by the declining demand from China and global economic slowdown being triggered by China, Europe and Latin American countries. The Chinese have been noticing a significant fall in demand amidst slow GDP growth (The downswing in commodity prices was sharp in 2015, particularly following the financial volatility that started mid-August, after China’s shock devaluation of the renminbi – with investors fretting about the country’s slowing economy. China registered a 6.9 per cent gross domestic product (GDP) growth rate in the third quarter, down from 7 per cent in the second quarter, the weakest rate since the 6.2 per cent expansion recorded in the first quarter of 2009 at the height of the global recession), European economy is been pressured by the day-by-day declining strength in Euro and weak economic health of few European nations and Latin American Countries who thrived on Increased Copper demand from China (~ 45 per cent of Global Consumption Demand) as the dollar continues to strengthen and demand continues to dwindle. 

Major copper producing country, Chile’s economy is feeling the full impact of a three-year decline in copper prices as mining output slumps, manufacturing shrinks and the government reduces spending plans to account for lower revenue. Copper output tumbled 14 per cent in January from the year earlier, leading an 8.3 per cent drop in industrial production, the national statistics agency. 

Long term fears continue to feel the grip of the bears. Emerging-market economic growth has mostly slowed, undercut by China’s weaker commodity appetite. Brazil’s economy had its biggest contraction in 2½ decades last year. Russia has been hit by a combination of low oil prices and international sanctions. South Africa, a big mineral exporter, has high unemployment and gaping budget deficits. Investors also worry that developing nations are struggling with high levels of dollar-denominated debt, which has become difficult to service after a two-year-long dollar rally. Standard & Poor’s Ratings Services said corporate defaults in emerging markets rose in 2015 to their highest levels since 2004. Meanwhile, Beijing could be forced to devalue its yuan under pressure from heavy outflows or in a move to boost its economy. That could have ripple effects by compelling other countries to lower the value of their currencies to remain competitive. Both the IMF and the World Bank point out that China’s transition away from investment-led growth toward an economic structure focusing on consumer-driven expansion has been instrumental in weakening base metal prices. This trend is expected to continue in next couple of months. The plunge in commodity prices was accompanied by a sharp slowdown in economic growth among commodity-exporting emerging market and developing economies. IMF data shows real GDP growth in this group of countries decreased to 4.6 per cent in 2014 from 6.3 per cent in 2011.

In the recent development China has reduced the Reserve Requirement Ratio (RRR). Since their peak in 2011, copper prices are down well over 50 per cent. Now, there’s light at the end of the tunnel which might support the copper prices in the coming days. In January, 315,000 tonnes of refined copper were imported into China—up 16 per cent from a year ago. In December, refined copper imports were the highest on record at approximately 423,000 tonnes. Moreover, if we look at the demand pattern of copper concentrate which is the raw material used to make copper metal a very positive trend seems to be emerging from China. In January, 1.17 million tonnes of copper concentrate were imported. It was the sixth consecutive month that more than a million tonnes were imported. Copper’s supply and demand fundamentals have become promising during this quarter. The metal’s picture was improving given 200,000 tonnes of planned first quarter output cuts by China’s copper smelters, further supply curtailments by Glencore and Freeport, and increased buying by China’s strategic supplier.

Elsewhere, in Europe despite all the negativity about the Chinese economy slowing down, we see China as a buyer of copper. Sentiment was brighter but still fragile, after a failure by a weekend meeting of the G20 group of leading economies to come up with concrete, new measures to boost growth. Emerging markets, which last year slumped, have rallied in recent weeks, amid a rebound in commodity prices and increasing confidence the U.S. central bank won’t soon raise interest rates. The turnabout is fueling a number of assets. Stocks in emerging markets are up 12 per cent since late January, according to the MSCI Emerging Markets Index, erasing most of the declines they sustained during a selloff at the start of the year. Currencies such as the Mexican peso and Russian ruble also have roared back from recent lows, up 7 per cent and 13 per cent, respectively, against the U.S. dollar. 

Most notably, the rebound in oil, metals and other raw materials has given a boost to these commodity-exporting nations and raised hopes that the worst of the commodity declines are over. High quality global journalism requires investment. After a momentary stagnation on the lower side, oil prices have started to climb amidst reports from Department of Energy being brushed aside by investors who are increasingly prepared to bet the worst of a 20-month long price rout is over. Prices for Brent crude are up nearly 33 per cent from January lows and Copper prices are up nearly 14 per cent. Prices have been hit by slow demand over the Lunar New Year, and global growth concerns that have flattened trade. With factories ramping up ahead of China's seasonal demand peak in the second quarter as copper's supply and demand fundamentals are likely to improve on the back of seasonal demand recovery from power grids and home appliance sectors, as well as resilient growth in the auto sector. Recent announcements from China, the world’s largest consumer of commodities, that it will continue to support economic growth, have helped support prices. 

Though, the above news are supporting the positive movement in the prices there are few bearish news too which are destined to pull down the copper prices which may not lead to materialization of expectation of higher demand after Chinese New Year. Although copper’s price has dropped 50 percent since 2010, some companies aren’t shelving production plans. Miners, including in Peru and China, are planning 7.88 million metric tonnes of new copper supply by 2020, equal to an increase of about 44 per cent over 2014. Thus we can conclude that the copper turmoil is far from over and the long-term investors are still advised not to venture with new investments into the sector, though the concentrate market is still an attractive investment avenue amidst increased processing demand.

Red Metal Continues to Feel Pressure of Uncertain Demand

The Copper market has recently been pressured by the lack of confirmed demand and rudderless wandering global economy. The US dollar has been the main guiding factor for copper market as the supply and demand factors have remained almost stable. Thus, if the U.S. Dollar continues to trend higher, and if expectations for economic growth in China and elsewhere remain gloomy, the decline in copper is likely to continue as per the current trend. Though the markets have shown slight improvement in the sentiment, the gains in recent weeks have come amid financial market turmoil and weak economic signals, and a more likely driver of the increase has been a weakening U.S. dollar. Copper trade which is denominated in dollars, gets cheaper as the U.S. currency weakens, driving stronger investment flows and commercial demand. Some of the market's gains in recent days can also be attributed to the traders closing out short positions that profit from falling prices as the market has rallied against them. A small support also came from the Chinese as the head of China's top economic planning agency opined that the country's economic growth target in 2016 is likely to be in a range of 6.5 per cent to 7 per cent. It’s important to note that 45 per cent of world’s copper demand comes from China. China’s weak economic health led to a 25.3 per cent fall in copper prices in the LME in 2015. There are the same demand concerns in 2016. In the LME, copper already fell by 6.7 per cent since the beginning of 2016.

When we analyze the demand and supply scenario we can see the balance on the surplus side. ICSG projections for 2015 indicate that the market should essentially remain balanced, while in 2016 ICSG forecasts a small deficit of around 130,000 MT as demand growth outpaces production growth. This compares with a surplus of 360,000 MT and 230,000 MT for 2015 and 2016, respectively, forecast at our April 2015 meeting. The revisions reflect substantial changes in market conditions since April 2015. Although a downward revision has been made to global usage in view of lower than anticipated growth in China, larger downward adjustments have been made to production as a result of recent announcements of production cuts. World mine production after adjusting for historical disruption factors is expected to increase by around 1.2 per cent in 2015 (a similar growth to 2014) to reach 18.8 MT. Despite announced production cuts, higher growth of around 4 per cent is expected in 2016 as additional supply is expected to arise from expansions at existing operations, ramp-up in production from mines that have recently come on stream and output from a few new mine projects. World mine production is estimated to have increased by around 3.5 per cent (520,000 MT) in the first ten months of 2015 compared with production in the same period of 2014. Concentrate production increased by 4 per cent while solvent extraction-electro-winning (SX-EW) increased by 1 per cent. The increase in world mine production was mainly due to a recovery in production levels at operating mines in Indonesia (61 per cent growth in Indonesian mine production as in 2014 output was constrained by a seven month ban on concentrates exports) and an 18 per cent increase in Peruvian output (benefitting from higher production rates at operating mines and a ramp-up in production from mines that started in 2014-2015). Production increased by 0.7 per cent in Chile while remaining essentially unchanged in the United States and China. World refined production is estimated to have increased by about 1.8 per cent (330,000 MT) in the first ten months of 2015 compared with refined production in the same period of 2014: primary production was up by 2 per cent and secondary production (from scrap) remained essentially unchanged. The main contributor to growth in world refined production was China (up by 4 per cent) followed by the DRC and India where production increased by 5 per cent, respectively. Output in Chile and Japan (the second and third leading refined copper producers) declined by 2 per cent and 3 per cent, respectively, while in the United States (the fourth largest refined copper producer), production dropped by 2 per cent.

In the first ten months of 2015, world apparent usage is estimated to have declined by around 1 per cent (210,000 MT) compared with that in the same period of 2014. Excluding China, world usage declined by around 3.5 per cent. Although Chinese apparent demand increased by around 1.5 per cent, usage declined by 4.5 per cent and 7 per cent in the EU and Japan, respectively, and by 46 per cent in Russia (following the withdrawal of Russia’s cathode export tax in September 2014).

In a move to support the copper market, the Chinese authorities have planned to reduce the minimum down payment required for first and second-time home buyers in most cities. This move would enhance the copper demand as China’s construction sector accounts for 25 per cent of copper demand, and China is the world’s largest consumer of copper. According to the data released by the General Administration of Customs, China imported 530,000 MT of unwrought copper and copper products in December 2015. The imports rose by 26 per cent compared to December 2014. It’s the second-highest monthly imports for unwrought copper and copper products by China.

As for the coming events the three important things which could govern the copper prices are China’s January trade data, which is set to be released on February 15, Freeport’s ongoing discussions with the Indonesian government and possible Russia-OPEC (Organization of Petroleum Exporting Countries) discussions on cutting crude production. The January trade data will be crucial for Freeport investors in two ways. First, China’s overall exports and imports will provide insight into the state of the world’s second-largest economy. Second, China’s copper imports will tell us whether copper demand is indeed strong or whether the spike in December copper imports was more of a one-time blip. Better-than-expected Chinese copper imports might have a positive impact on copper prices. However, if China’s copper imports dip significantly from last month’s level, it could spoil market sentiments. Freeport-McMoRan (FCX) owns the Grasberg mine in Indonesia (EIDO), and Rio Tinto (RIO) is Freeport’s partner in this mine. Rio Tinto also owns the Oyo Tolgoi mine in Mongolia through its subsidiary Turquoise Hill Resources (TRQ). Freeport’s export license in Indonesia is currently suspended, as the company failed to reach a deal with the Indonesian government to extend the export license. The resumption of license is likely to increase the inflow of copper in the global market. There have been reports that OPEC and Russia are planning to reduce crude oil output in a coordinated way and if the deal is through it would bring down the cost of copper mining for Freeport significantly.

Thus, we can see from the above discussion that since the copper demand and supply scenario is gripped by uncertainties, there are a lot of ifs and buts encircling the copper trade and finding smooth passage through this turmoil would need significant and sustained boost of demand from the Chinese and global partners.

Demand Crises Deepens in Copper Industry

Copper's widespread use across different industries means it is often viewed as an indicator of global economic health, with declining prices indicating waning demand and a forthcoming slowdown. The new consumer driven economic policy of China has added increased pressure on the copper and other metal markets. China’s demand for raw materials has cooled off significantly, as it has tried to shift its economy away from construction, investment and exports to one driven by consumption and services. The transformation is already jolting countries in Africa, from those with diversified economies, like South Africa, to those dependent on a single export, like Zambia or Angola, even as the Chinese government and businesses express long-term commitment to the continent. It has also affected the major mining countries in Latin America.

Apart from the basic copper mining countries, the slowdown in demand has also taken its toll on the economic activities of the developing countries like India. Indian copper demand is likely to expand by 7 per cent a year as more investment in power and infrastructure industries boosts usage of the metal. With the global mining industry reeling from a slowdown in top user China, the world is looking to India for the surge in demand. More government spending and emphasis on expanding manufacturing should significantly raise annual copper demand. Amidst the lows in the global copper market, the Indian counterpart is also seeking increased support from the government to stay afloat. Copper sector, which is facing a crisis due to falling prices and cheap imports, today urged the government to eliminate the bottlenecks to ensure sustained growth. The major issues of Indian copper industry are inverted duties due to free trade agreements (FTAs), improvement in the anti-dumping duty and withdrawal of export incentives.

Coming to the basics, the production of copper has continued with supply surplus situation. Global production increased around 3 per cent in the first eight months of 2015, according to the International Copper Study Group (ICSG). Only two of the top 10 producers have signaled their intent to buck this trend. US-based Freeport-McMoRan, the second biggest copper miner, will cut 113,000 tonnes, while Glencore, the number three, will slash 455,000 tonnes – just under a third of its total. Last week Glencore began to suspend work at its Mopani mine in Zambia, laying off 4,300 workers. For the rest, cutting production to prop up prices runs the risk of missing out when they rise. As per ICSG there is a surplus of around 70,000 tonnes of copper, but accounting for “unreported” stocks in China, there is an expected shortfall of 5,000 tonnes. World refined production is estimated to have increased by 1.6 per cent (235,000 MT) in the first eight months of 2015 compared with refined production in the same period of 2014. Primary production was up by 1 per cent and secondary production (from scrap) was up by 3.5 per cent. The main contributor to growth was China (up by 4 per cent), followed by the Philippines and Indonesia where production was reduced in the first quarter of last year due to operational constraints. Production also increased in the DRC (+8 per cent). Output in Chile and Japan (the second and third leading refined copper producers) declined by 3 per cent and 2 per cent, respectively, while in the United States (the fourth largest producer of refined copper), production dropped by 7 per cent. Despite cut in the production from major mining giants, Australian miners are still producing more and are ready to expand production. The weaker Australian dollar is obviously an advantage for miners Down Under, which has cushioned the impact of the drop in US dollar-denominated copper prices. They are gaining market share and it will thus be in their interest to keep extracting as much of the stuff as possible, in theory until such a time that marginal costs from additional units of production equal marginal revenues from those units sold. So much like the oil market situation, the glut is likely to remain in place in the near term and thus weigh on prices. But in the long term, the market should naturally tighten and prices recover. Apart from Australian miners, there are still many producers unwilling to cut production despite the low prices. Codelco, expressed that they won't cut copper production as prices slump, pointing to the fact that if the company suspends production, then it would be difficult to restart, so they would rather try to lower costs. Also, there is skepticism about how many of the announced cuts will actually be made, and how long they will last.

The current demand situation for the global copper is not so encouraging with practically any indication of change in Chinese policy which could spark sudden spike in demand. The bigger players are gambling that a price recovery will come before pressure mounts to cut costs further. China may be slowing, but estimated GDP growth of 6.5 per cent a year was still grounds for optimism. Its role in electrics and consumer devices will keep it in demand in economies that are moving beyond heavy industry, such as China. In the first eight months of 2015, world apparent usage is estimated to have declined by around 2 per cent (295,000 MT) compared with that in the same period of 2014. Excluding China, world usage declined by around 4 per cent. Although Chinese apparent demand increased by around 0.5 per cent, usage declined by 5 per cent and 7 per cent in the EU and Japan, respectively, and by 50 per cent in Russia (following the withdrawal of Russia’s cathode export tax in September 2014). 

On the economic front, data showed US job growth increased solidly in November, which most likely will pave the way for the Federal Reserve to raise interest rates in December for the first time in nearly a decade. The stronger-than-expected jobs data failed to boost the US dollar much, perhaps because many investors had already bought the US currency in anticipation. A firmer US dollar usually weighs on metals priced in the US currency, making them more expensive for buyers outside of the United States.

Despite recent gains, copper prices are down 11 per cent since the start of November as a combination of a stronger dollar and persistent worries over future demand prospects from China weighed. The Asian nation is the world’s largest copper consumer, accounting for nearly 45 per cent of world consumption. A sustained price recovery needs better demand. In China, a property fit-out cycle remains on track for 2016, but infrastructure construction prospects appear weaker if our recent China trip is any guide. Supply cuts are needed to rebalance markets, but cost deflation means cost curves (and market clearing prices) are falling.

On the whole, metal prices are expected to continue heading lower. China, emerging market and European demand worries, a strengthening U.S. dollar, along with investors that see a potential corporate debt crisis, should continue to keep the base metal complex subdued into early 2016.

1st Rabi Crop Estimates for 2015-16

With the Rabi Sowing season coming to its end, NBHC Pvt. Ltd. is releasing its first Rabi crop estimate for the year 2015-16. Before coming to the actual estimates we would like to highlight few weather developments which have put the Indian crop production on the back foot. In the current season the monsoon had arrived and spread all over India almost a month ahead of the scheduled time, but with the backdrop of El Nino (one of the strongest since 1997) and unusual warming of the Indian Ocean Dipole the monsoon fell short by 14 per cent on the seasonal basis with increased inequitable distribution. Moreover, the Central Water Commission which monitors 91 major reservoirs in the country has reported capacity of 80.26 BCM as against 100.39 BCM on 10.12.2014 (last year) and 105.05 BCM of normal (average storage of the last 10 years) storage. Current year’s storage is 80 per cent of the last year’s storage and 76 per cent of the normal storage. Owing to weak monsoon and lack of rains from the retreating monsoon (winter rains) the current winter crops is likely to face severe stressful growing season leading to lower output. 

As per our assessment and market feedback on sowing crop progress, the total Rabi food grain’ production is expected to decline by 13.38 per cent over last year to 111.47 million MT. The drop in the production estimate is because of the recent delayed sowing of Rabi crops and expectation of lower yield in major producing areas. Wheat is expected to show a decline in area and production by 16.27 per cent and 16.51 per cent respectively over last year owing to expected decline in yield. The lack of residual moisture, lower rains from retreating monsoon, increased incidence of pest & disease and delayed sowing is likely to be the major cause for the shortfall. In most of the Rabi crop there has been a marginal to significant fall in the acreage which itself is painting a gloomy picture to the overall Rabi crop outlook for the coming season of 2015-16. 

In the pulses sector, we expect the area under Chana to marginal up by 3.12 per cent over last year and the production is likely to up by 6.73 per cent to 7.69 million MT. But overall, the total Rabi pulses production is likely to decline by 10.82 per cent over last year. 

The oil seed sector is likely to see a decline of production by 2.13 per cent. The decline of 8.92 per cent in production is also expected in case of groundnut over last year.

Commodity Market to Become More Robust Under SEBI

The merger of SEBI and FMC is an epic event in the history of Indian commodity market with which the regulation of the commodity derivatives market shifts to SEBI under the Securities Contracts Regulation Act (SCRA), 1956. SCRA is a stronger law, and gives more powers to SEBI than the Forward Contracts Regulation Act (FCRA) offered to FMC.

Prior, to the merger The FMC had been regulating the commodities markets since 1953, but it was seen to have lacked the muscle to tame the alleged irregularities in this market segment. It was a low-profile regulator and was headed by a government appointee and it conducts its activities through plan and non-plan funds from budget grants and its staff recruitment system was dependent on what the government plans. In the absence of a powerful regulator, the commodities market has been more prone to illegal activities like ‘DABBA TRADING’ (where a stockbroker executes a customer’s trade done through his local books, but not reflecting at the exchange, with the hope of making some gains at a future date) compared to the better-regulated stock market. With the official merger on 28^th September 2015, one can now expect a stronger regulation as SEBI is an autonomous body with wide, sweeping powers to control and develop capital markets, mutual funds, exchanges and intermediaries. Apart from the wiliness of department of consumer affairs (DCA), Government of India, FMC had also taken up several measures to bridge the regulatory gap between securities and commodities markets which includes tightening the shareholding norms of commodity exchanges, improving corporate governance and revamping risk management, warehousing and investor protection norms.

FMC merger with SEBI has now opened up new challenges for the commodity regulators. The merger is aimed at streamlining the regulations and curb wild speculations in the commodities market, while facilitating further growth there. Expectations from the merger are high from market participants, investors and the government itself. Accordingly, the SEBI from day one is on the move. It has created a separate Commodity Cell and has set up new departments for regulation of commodities derivatives market. It has formed a Commodity Cell by posting its senior officials, while two internal departmental committees (one each in Integrated Surveillance Department and Market Intermediaries Regulation and Supervision Department). It has also sought help from the Agriculture Ministry with regard to the data sources for the prices and to improve the methodology for determination of final settlement price. The major challenge for the SEBI is the regulation of the new regime is that the underlying commodity derivatives — the physical commodity — which is not within the regulatory purview of SEBI. The quality checks and safe-keeping of physical commodities at warehouses is carried out by an independent agency, the Warehousing Development and Regulatory Authority (WDRA). A convergence of regulation between SEBI and WDRA will be required to prevent spot future financial irregularities. The other major challenge is the launch of new financial products / instruments of trading which is certainly daunting under present state of commodity market. In India, future trading in food-related commodities always has an element of political sensitivity, unlike equity derivatives. But, if new products like options or index futures in commodities do not come or new participants do not enter the markets, it will be merely a case of ‘regulatory laziness’ which the India’s commodities derivatives markets cannot afford at this stage.

Regulatory expectation for the SEBI is high with much tougher standards as it has regulated the markets efficiently and effectively for over 25 years, making Indian Security Market as one of the vibrant markets in world. Strict guidelines and transparency in functioning of SEBI would also help commodities market to gain confidence of traders. It has better trained human resources and management practices that can help SEBI to improve conditions in commodities exchange. Most of the countries except Japan and US have a same regulator for commodities and securities, thus our commodity market would be increasing aligned to the international practices and would enhance the financial integrity. It will allow introduction of much needed Commodity market reforms as SEBI has been willing to introduce trading in commodity options and indices after initial one year of transition which would allow small farmers to sell their at committed rate at a future date. Under SEBI all commodities will govern by single strong act i.e. Securities Contract Regulation Act which covers all aspects and helps to monitor the commodity prices and identify defaulters. It would streamline the transaction process provide confidence better opportunities to investor in commodity derivatives. SEBI is in support of introducing foreign institutional investment in commodity trading, which was not allowed earlier. This would increase foreign participation and increase liquidity.

The first change action in the commodity market is already felt in the market with the SEBI issuing norms for traders of commodity derivatives exchanges that need to be complied with. The existing members of commodity derivatives exchanges will be required to make an application for registration and such existing members of commodity derivatives exchanges will be required to comply with the Securities Contract (Regulation) Rules, 1957, within a period of one year from the date of transfer and vesting of rights and assets of FMC with SEBI -- by September 28, 2016. For new members, the new regulations will apply from the beginning. The other changes likely to be brought in the commodity market are that the SEBI would act against entities violating the Essential Commodities Act, if they were present in the commodity futures markets. SEBI may look at improving the physical delivery mechanism and warehouse logistics. The last couple of years have seen a host of warehousing reforms towards stronger governance and improved quality standards in exchange-approved warehouses. With the warehousing sector under the regulation of WDRA, a stronger and synergistic approach between the two regulators would pave the way for robust market development. Moreover, with the equity and commodity regulators merging, equity exchanges can open commodity platforms and vice versa.

The extent of market intervention measure in the Indian commodity market has its own inbuilt challenges. Most of the commodities are controlled by government in sense of minimum support prices, stock holding limits, import and export restrictions even non-agricultural goods like gold , oil has government intervention MSP, import-export regulation, invoking provisions of Essential commodities Act distort market trade and commodity prices. For smooth processing of transactions SEBI has to ensure the no/lower government interventions. It needs to expand its infrastructure because commodities are physical goods. It also needs to develop proper parameters to ensure there won’t be any troubles while delivering. Price discovery has been a major issue in commodities trading, and if the SEBI addresses that concern, it will be a big confidence-booster for participants. SEBI has to focus on how prices and benchmark rates are fixed in commodity markets and also look at the possibility of having products like options and futures.

NBHC Kharif Crop Estimates for 2015-16 (Final)

With the Kharif sowing season almost on the verge of completion and early harvest arriving in the market, we at NBHC are releasing our Final Kharif Crop Estimate - 2015-16. As per our analysis and industry’s feedback on the crop progress and the status of the current crop harvest, the total Kharif Cereals production is likely to decline by 3.72 per cent. The reason for the shortfall is very much evident. The current season the monsoon had arrived and spread all over India almost a month ahead of the scheduled time, but with the backdrop of El Nino (one of the strongest since 1997) and unusual warming of the Indian Ocean Dipole the monsoon fell short by 14 per cent on the seasonal basis with increased inequitable distribution. A situation of meteorological drought in regions of Maharashtra, Karnataka, Uttar Pradesh, Bihar, Andhra Pradesh and Telangana had taken a big toll on the Kharif crops in these regions. Based on the above conditions we have come to a conclusion that the total Kharif crop production scenario for the year 2015-16 would be on the lower side compared to 2013-14 and 2014-15.

Our first report was released on 22nd August 2015. In our first report we had estimated a drop in the acreage for Maize, Bajra, Pulses, Cotton and Sugarcane. We stick to our estimate of lower acreage on the above crops with mild adjustments.

As per our estimates, the overall cereals production for the 2015-16 is expected to be marginally down about 3.72 per cent over 2014-15 (116.35 million MT against 120.68 million MT). Amongst the cereals, Maize is expected to decline by 25.88 per cent to 13.02 million MT and Bajra is expected to decline by 14.24 per cent to 7.92 million MT. For Rice, we are estimating a marginal drop in the production by about 6.72 per cent owing to decline in the productivity in West Bengal, Uttar Pradesh and Chhattisgarh and prevalence of dry weather in major growing areas.

In the pulses sector, amidst extreme dry conditions and lack of rains, there was a significant drop in the acreage by 10.29 per cent. The most suffered crop in terms of growth was Moong followed by Urad and Tur (Pigeon pea) whose area declined by 9.78 per cent, 8.78 per cent and 4.26 per cent respectively. As per our estimate, Tur production for the year 2015-16 is expected to decline by 26.56 per cent to 2.20 million MT over 2014-15 whereas the production of Urad and Moong is likely to decline marginally by 44.12 per cent and 45.98 per cent to 0.88 million MT and 0.58 million MT respectively. Overall, the total Kharif pulses production is likely to decline marginally by 22.90 per cent over last year.

We stand by our earlier estimate of drop in the overall oil seed production with further reduction in crop size. Maximum decline of 27.76 per cent is expected in case of soybean and 9.07 per cent in case of groundnut.

In the current cropping season, we continue with our negative outlook in terms of area and production. In sugarcane, the production is likely to decline marginally by 5.53 per cent and in cotton the production is likely to decline by 21.78 per cent over last year.

Copper Continues to Struggle amidst Sustained Weakness in Global Economies

The copper market continues to feel the heat for the sustained weakness in global economies. The scenario of declining demand from the major consuming countries, increasing strength of dollar and below par performance of major global economies of China, US and European Union continue to ascertain the fact that this lull phase of the copper industry is likely to continue for a much longer period than being expected by major participants. To analyse the above situation in depth we need to assess the current demand and supply situation, latest development in major economies and situation the currency market.

Like other beaten down commodities, copper has fallen victim to its own success. Surging prices on the back of voracious demand from China’s then double digit growth spurred mining companies to zealously crank up production. The elevated production, combined with a Chinese economy in its fifth year of decelerating growth, has created a supply glut that is unlikely to clear anytime soon. Copper supply is forecast to run ahead of demand until at least 2019. While producers such as miner-cum-trader Glencore have announced plans to scale back production and an 8.3 magnitude earthquake in Chile has disrupted supply at some mines, the cuts will do little to soften the blow from softer demand from China. Manufacturing continued to weaken in September, with the Caixin Purchasing Manufacturers’ Index recording a preliminary reading of 47, falling from a final reading of 47.3 in August. The China’s annual copper demand growth is likely to slow to roughly 3 per cent till 2017 against the 9 per cent pace it averaged over the past five years. The sharp slowdown in industrial activity in China is disastrous for copper producers, since China consumes 45 per cent of their output. Its attempt to shift from an investment-led economy to a consumer one has raised fears of a structural decline in the amount of copper it will need. However much electrical wiring there is in consumer goods, it does not match the vast tonnages consumed during the recent decades of rapid urbanisation in the form of power lines, telecommunications cables and the wiring of big apartment complexes. Power grid investment, which accounts for around 30 per cent of Chinese copper consumption, is expected to fall sharply in coming years as the expansion of the electricity network is poised to slow significantly. China’s production of consumer goods that contain large amounts of copper, such as refrigerators and air conditioning units has also been disappointing this year and to add to it the demand from most developed countries is expected to remain subdued. Amidst the above developments the MINERS should prepare in advance for weak demand from many traditional mainstays of copper consumption.

The latest supply situation suggests the surplus situation for the industry. World mine production is estimated to have increased by 3 per cent (280,000 MT) in the first half of 2015 compared with production in the same period of 2014. The increase in world mine production was mainly due to a recovery in production levels at mines in Indonesia and Chile, although the latter also benefited from production at mines that started last year. Aggregated production in these two countries increased by 6 per cent. Production in Peru increased by 8 per cent and in the United States and China, production declined by 4 per cent and 3 per cent, respectively. World refined production is estimated to have increased by 3 per cent (350,000 MT) in the first half of 2015 compared with refined production in the same period of 2014. The primary production was up by 2 per cent and secondary production (from scrap) was up by 8 per cent. The main contributor to growth was China (up by 5 per cent), followed by the Philippines and Indonesia where production was reduced in the first quarter of last year due to operational constraints. Production also increased in the DRC (+11 per cent). Output in Chile and Japan (the second and third leading refined copper producers) declined by 2.5 per cent each, while in the United States (the fourth largest producer of refined copper), production dropped by 6 per cent. The average world refinery capacity utilization rate for the first half of 2015 increased slightly to 82 per cent from 81 per cent in the same period of 2014.

By the first half of 2015, world apparent usage is estimated to have declined by around 2 per cent (245,000 MT) compared with that in the same period of 2014. Chinese apparent demand declined by around 1 per cent based on a 10 per cent decrease in net imports of refined copper from the high net import level in early 2014 and consequently higher apparent usage. Excluding China, world usage declined by around 3 per cent in the first half of 2015 mainly due to a decline of 53 per cent in Russia’s apparent usage and a decline of 8 per cent and 5 per cent in Japan and the EU, respectively.

In spite of increased supply of bearish news, the positive development in the consuming countries is likely to sustain the prices for the short run (3 to 6 months henceforth). Japan's factory output unexpectedly fell for the second straight month in August, fuelling worries that a prolonged slump could quash an unsteady economic recovery and raising expectations of fresh stimulus from the Bank of Japan to reignite growth. U.S. consumer confidence rose and was higher than expected in September. China has also decided to halve sales tax on small cars from 1st October 2015, boosting local auto shares, as the government tries to revive growth in the world's largest car market. This move from China is expected to trigger car production recovery, which in turn will support demand for copper and steel. This is just one more example of supportive Chinese fiscal policy, which could see commodities’ demand cyclically improve over the coming three to six months. As per estimates, transportation accounts for 10 percent of China copper demand. A 2-percent increase in auto sales would push up copper demand by 37,000 tonnes this year, 100,0000 tonnes next year and 166,000 tonnes in 2017. Chile's second-biggest copper mine Collahuasi, owned by London-listed Anglo American and Glencore, said this week it planned to cut output by 30,000 tonnes. That is not a large amount in a market estimated at around 23 million tonnes this year, but it adds to recent announcements about output cuts and reinforces expectations of miners taking out more capacity which would in-turn reduce the supply of copper from the main stream leading to further support to the prices.

The overall short term investment sentiments in the red metals continues to be gloomy, but if one think of investing with the time line of over 3-4 years, this is certainly a time to enter with at least a investment exposure of about 20 per cent of the whole portfolio.

Weak Global Economies & Slackening Demand Pulling Down Copper Industry

Presently, the Asian economies are the driving force for the world’s economy. China is the largest emerging market as well as the world’s second-largest economy. Its economy is manufacturing-intensive and also largely export-driven. A decline in its PMI indicates a reduction in production levels, which hampers both imports and exports. A fall in China’s production levels results in lower imports of raw materials from countries like Australia and Brazil. Lower demand for inputs, especially commodities, calls for a fall in commodity prices, which again affects the businesses of commodity firms exporting to China. There’s also the likelihood of a fall in the imports of machinery and automobiles from Germany to the country. China has also lowered the import of metals. China is the largest consumer of metals, so this move resulted in a fall in stock prices for the above sectors across all equity markets. The turmoil in the Chinese economy is also evident from the developments in the European economy. Since, China has trade relations with many European countries, and the decline in China’s manufacturing activity affects the country’s imports and exports. Although the United Kingdom’s exposure to Chinese trade is just 3.5 per cent, China’s impact on the United Kingdom is inevitable. China’s economic slowdown has deeply affected its trade with Germany and France (machinery and automobiles). Consequently, UK trade in related industries, such as automotive parts, with these European countries has also been affected. This has created turbulence in the UK stock market.

Although China, a major engine of global growth, has been slowing for some time, financial markets have nevertheless tumbled over fears its economic growth will decelerate faster than expected. With concerns mounting about the country’s economic slowdown, the yuan has faced downward pressure as investors sell the currency in markets outside China. For more than a decade, the U.S. and other countries castigated China for its currency policy, saying the yuan’s level gave the country’s exporters an unfair advantage at the expense of its trading partners, but the current Yuan devaluation of nearly 4 per cent (on 11^th August 2015) initially spurred worries in global financial markets as investors saw it as a signal that Beijing was reverting to its old policy playbook in a desperate effort to revive a flagging economy.  The Chinese economic turmoil fuelled worries in the U.S. that China’s political elite may pull back on the promises it made to make the tightly managed economy more market-oriented and open to international investment. Inflaming those concerns, the Chinese State Council launched an effort to boost exports just days after the currency move, including through a more flexible Yuan. China’s decision of devaluation last month to devalue its currency riled neighbours and fuelled investors’ fears about a sharp slowdown in the world’s No. 2 economy.

The copper market has been gripped by fears of further weakening of global economies during the last few months. The sustained weakness in the Chinese economy, with a slowdown in its GDP growth and fears of further devaluation of Yuan has triggered increased weakness in this red metal market. Apart from the turmoil of the Chinese currency, the shrinking global demand and rising supplies have maintained sustained pressure on copper prices. 

The copper market has recorded a surplus of 151 KT (Kilo Tonnes) in January to June 2015 on the back of a 295 KT surplus for the year 2014. Outstanding reported-stocks declined during May and June, but have remained 93 KT higher than at the end of December 2014.

China's copper smelters are considering deeper output cuts due to low metal prices and as the supply of raw material scrap and concentrates from domestic mines falls. Lower copper production implies a fall in exports, which again adds to China’s troublesome condition, where recovery seems to be far-fetched, given the existing conditions.

Month on month China's refined copper production dropped 4.5 percent in July 2015, down from June 2015. World mine production during the period January 2015 to June 2015 was 9.45 million MT which was 3.8 per cent higher than in the same period in 2014. Global refined production rose to 11.25 million tonnes up 2.4 per cent over the previous year with a significant increase recorded in China (up 161 KT) and India (up 48 KT).

Global consumption for the period January -June 2015 was 11,099 KT compared to 11,231 KT for the same period in 2014. Chinese consumption in the period January - June 2015 fell by 63 KT to 5337 KT which represented 48.1 per cent of global demand. European Union - 28 productions rose by 0.5 per cent and demand was, at 1783 KT, 6.8 per cent above the aggregate during the period January-June 2014. Excluding North America and outside of China, the story for copper demand has been one of weakness in the emerging markets and outright contraction in demand from the second- and fourth-largest markets of Europe and Japan.

With roughly 40 per cent of the world’s copper consumed by China, recent data showing slower exports and manufacturing activity weighed on prices as investors shed the industrial metal. The impact was immediately felt in the major copper producing countries. Latin American currencies bore the brunt of a rapid plunge in commodity prices coupled with the ongoing slowdown in the Chinese economy. Speculations were rampant that a weakening yuan could intensify the competition among major commodity exporters throughout the continent. Over the last few years, Latin America and China have forged economic ties, whereby Latin American countries provide raw materials to China, while China processes the raw materials and exports them back to Latin America. With China undergoing a strategic shift towards domestic consumption to drive growth rather than exporting manufactured products, the balance of forces might undergo a rearrangement. This shift could hurt economies that are dependent on China for their internal growth. But, the shrinking copper demand has led to a state of crises in copper producing mines. Codelco, the Chilean copper mining giant, announced half year results on last week that showed profits dropping by a third to $875 million despite an increase in production of 5.5 per cent compared to last year and has also resorted to cut costs by around $1 billion this year and is 60 per cent on its way to achieve that target.

The short term outlook for copper prices remains dim, with supply from the world’s mines expected to exceed global demand all throughout the year 2015 and continue for 2016. The latest statistics show that average housing prices have been rising for the last 3 months. However, major property gluts typically take several years to work through and are often characterised by a long basing or trough period. This could easily be the phase that China is now entering. While overall average prices have stopped falling, the gains are patchy and confined to major capital cities. In the longer term, China’s rebalancing towards domestic consumption and services and away from infrastructure development and heavy manufacturing would also be a relative negative for copper demand.    Thus, the future demand growth won’t be as great as it was a few years ago, even after the current cyclical downturn eventually ends and the outlook for copper prices remains bearish, with an economic slowdown in China, in particular, which is expected to dent the infrastructure-driven demand.

NBHC Kharif Crop Estimates for 2015-16 (First)

With the Kharif sowing season almost on the verge of completion we at NBHC are releasing our 1^st Kharif Crop Estimate - 2015-16. As per our analysis and industry’s feedback on the sowing progress and the status of the current crop, the total Kharif Cereals production is likely to decline by 8.98 per cent. For the current season the monsoon had arrived and spread all over India almost a month ahead of the scheduled time, but with the backdrop of El Nino (one of the strongest since 1997) and unusual warming of the Indian Ocean Dipole is beginning to take its toll on the Indian Kharif crops. So far the report of the first sowing of Kharif crops has been encouraging with 93.94 million hectares against 92.94 million hectares reported in 2014-14 till 21^st August 2015. The real concern in the monsoon development and crop progress lies in the coming days with forecasts of meteorological drought for the rest of monsoon months in regions of Maharashtra, Karnataka, Uttar Pradesh, Bihar, Andhra Pradesh and Telangana. The crops sown in early June in these areas are already experiencing moisture stress. Based on the above conditions we fell that the total Kharif crop production scenario for the year 2015-16 would turn out to be as explained in the table given below.   

Rice is expected to show a marginal decline in area by 5.58 per cent and a dip of 6.29 per cent in production over last year owing to increased insect infestation and excessive heavy rains in major paddy growing areas. In Maize, which is the other major cereal crop, the area is expected to decline by 10.86 per cent and the production is expected to decline by 25.88 per cent to 6.54 million hectare and 13.02 million MT respectively as major stretch of maize producing areas in Maharashtra, Karnataka, Andhra Pradesh and Telangana are facing near drought situation. Amidst forecast of lesser rains and dry weather for the coming month (September) the other cereals crops have also been affected. Maximum improvement is expected in Jowar whose production is expected to expand by 14.83 per cent as the dry weather is likely to improve the yield for this hardy crop. Lack of remunerative income has led Bajra farmers to shift their cropping pattern to other cash crops. Thus, for the year 2015-16 Bajra area and production is expected to decline by 20.28 per cent and 18.61 per cent respectively.    

In the pulses sector, the moisture stress situation in the pulses growing states of Madhya Pradesh, Karnataka, Andhra Pradesh and Telangana is likely to take its toll. We expect the area under Tur, Moong and Urad to decline by 10.56 per cent, 5.37 per cent and 2.29 per cent and likewise the production to decline by 12.10 per cent, 7.59 per cent and 9.48 per cent respectively. Overall, the total Kharif pulses production is likely to decline by 9.96 per cent over last year. 

The oil seed sector is likely to see a decline of production by 8.33 per cent. Maximum decline of 27.05 per cent in production is expected in case of groundnut. 

In this current monsoon season, the cash crop section is likely to show a negative growth in terms of production. In sugarcane, the production is likely to decline marginally by 14.87 per cent and in cotton the production is likely to decline by 9.34 per cent.