Commodity prices have had a dream run in the last decade or so. Increasing demand from China and other emerging markets drove the prices. However, the same have started falling off late. And that's because the demand dynamics have changed in the light of current slowdown. In China, the manufacturing activity has witnessed a slowdown. Same is the case with US and Europe.
But the fall in prices has been of little help to commodity consumers in India. That's because of the steep decline in rupee. Although the commodity prices have been declining globally, depreciating rupee is negating the benefit of decline. Take the case of crude oil for example. While crude prices declined to US$92 a barrel recently before increasing rapidly in the last few days, the price of the Indian crude basket in rupee terms was relatively stable. Same was the case with copper. The metal declined by about 12% in international markets. But the fall in India was under 1%.
While currency is the one factor that is affecting commodity prices, demand supply balance is another. While the demand may have slowed down recently due to global factors, it should be remembered that commodities typically exhibit low cor-relation with equities. And considering the current environment, liquidity is bound to chase alternative asset classes like commodities. But this is true for non-industrial commodities like gold and silver.
Demand for industrial commodities like aluminum, copper, zinc etc is on a decline due to slowdown. And the downward trend might persist for sometime in the future as well considering that the revival will be gradual. Thus, once the currency effect gets negated, companies from auto, consumer durables and construction should see their margins revive. And this would be a blessing for India Inc considering that the corporate profitability was under pressure due to commodity price inflation.