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What commodity markets tell us about recession

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Commodity prices are an indicator of times to come. Over the past year, metals and energy prices have taken a knock. If you observe the recent trend, it is even a sharper fall than in previous months. The selloff in the commodity markets indicates weak global demand going forward. It emanates from fears of a recession. Germany, the largest European economy and exporter, has slipped already. In America, if the US Congress disagrees on enhancing the debt ceiling, the largest economy in the world would default on loan and expenditure obligations. Global rating agency Fitch has already warned about reviewing the AAA credit rating awarded to the sovereign debt in the US. That can induce a recession that US treasury secretary describes as ‘catastrophic’.

The situation in the world is volatile. However, one country’s problems could be other country’s advantage. Such is the irony of the world economic order.

In India, stock markets are positively reacting to weaker commodity prices. As a net importer of commodities, India’s current account deficit is expected to narrow. That will likely ensure that the Indian economy is insulated from external inflation.

An important commodity for India is coal. While coal prices are expected to remain lower than in 2022, they are still higher than the average prices over the years. New capacity is entering the market, and India’s reliance on coal will likely stay put in 2023-24 as a significant source of power generation. According to India Ratings, major coal producers in India will likely do well. “Despite the continued negative free cash flow expectations in FY24 amid large capex plans, the key rated sector participants are likely to maintain an adequate liquidity position and benefit from strong financial flexibility and access to capital markets,” the agency argued.

For specific sectors, softer steel prices mean a sharp profit fall for some of the largest steel makers. India is the second biggest producer of steel. India Ratings, an arm of FITCH ratings, argues that average operating profit margins fell to 3.6% in 2022-23. A fall in international steel prices and increased coal prices are reasons for the margin squeeze. The outlook is not fancy, either. Steel companies are borrowing more to meet domestic steel demand due to increased government spending in the infrastructure sector.

Tata Steel, the biggest private sector steel maker, is pinning hope on the export revival. In the quarterly conference call, the company, T V Narendran, MD and CEO at Tata Steel, expressed concerns about China. The opening of the economy in December 2022 was considered a positive by the global commodity markets. Prices rose in anticipation of the growing demand. While the Chinese economy is likely to grow at over 5%, it is more consumption-led than manufacturing. China is the biggest producer and exporter of steel and has put out additional capacity in the international market. “Suddenly an extra 2 million tonnes of steel coming out of China at a point in time when the rest of the world was still a bit fragile didn’t help the sentiment,” he told analysts. Commodities like iron ore, oil, and copper have all been corrected over the past weeks and the year. Share prices of companies that produce these commodities or trade in them will likely remain active due to the pulls and pressures of global demand.

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