Geopolitical tensions threaten supply-demand outlook of commodities

Commodities witnessed heightened volatility so far this year due to escalating geopolitical tensions that threaten the supply-demand dynamics of raw materials. Uncertainty over the US Fed policy decisions and feeble global growth outlook too had an impact on the sentiment.

Gold and silver prices returned to the limelight during this period. In the key London market, gold prices have been hovering above $2,500 an ounce, gaining more than 22% since January this year. The rise in prices was primarily due to a combination of factors like increased geopolitical tensions, US rate cut speculation, higher central bank buying and a moderate global growth outlook.

Silver prices also gained, but worries over industrial demand restricted major rallies in the commodity. In May, domestic silver prices hit an all-time high of Rs 96,493 per kg in the futures market but failed to retain the momentum thereafter.

The Middle East tensions and the war between Russia and Ukraine bolstered the safe-haven demand for bullion for the last several months. As a tangible asset that holds intrinsic value, bullion often becomes a preferred investment during times of uncertainty, driving its price upwards.

Meanwhile, domestic gold had corrected drastically from its lifetime high in July, followed by an import duty cut on gold and silver in the union budget. Indian government has slashed the duty on gold and silver to 6 percent from an earlier 15 percent. This reduction effectively brought down the overall taxes on gold and silver in the country to 9 percent. This move is expected to make the domestic gold market vibrant and strong which may be good for the economy. Demand worries continue to put pressure on energy commodities like crude oil and natural gas. Crude oil in the key US NYMEX platform broadly traded in a range inside $88-71 a barrel throughout this year. The recent global economic releases from the US, China and Europe fell short of investor expectations raising the risk of a sluggish global economy which would weigh the demand for oil. However, losses were limited due to the potential drop in supplies from the Middle East amid the ongoing war and OPEC plus production policies. Natural gas prices were also under selling pressure. The benchmark US gas prices have fallen about 15 percent during this year. A similar price move was witnessed in the domestic futures prices as well.

An industrial slowdown in Europe, record high production and exports from the US and a decline in demand caused by above-normal temperatures in key consumers like the US and Eurozone impacted gas prices worldwide.

Mixed sentiments prevail in base metals. Most industrial metals had a slow start in the initial months but sharply gained momentum later because of worries about supply bottlenecks. The most used base metals like copper and aluminium gained over 10% despite weak China demand. Zinc prices gained over 17% and lead managed to add 4 percent since the start of 2024.

Slowing economic activities in major economies dented demand for some base metals. As the world’s manufacturing powerhouse, China has the highest global demand for most of the industrial metals. However, it is well known that the world’s second-largest economy is struggling to achieve the government’s desired level of growth as it confronts large capital outflows, a real-estate bubble, growing debt crisis, and other issues.

(The author is Head of Commodities, Geojit Financial Services)