Commodities prices to take a hit when US tapering begins.

Prices of commodities could head south as soon as the US Federal Reserve begins to cut its $85 billion-a-month stimulus programme as hedge funds and money managers will cash out, a global seminar on edible oils was told on Saturday. “Currently, interest rates are near zero and at the bottom. But once the tapering happens and the interestrates go up, money managers and hedge funds will switch over to other gainful investments such as bonds,” said James Fry, Chairman, LMC International, London.

“It is a bad decision on the part of the US Fed not to taper its stimulus plan. Sooner or later, it has to begin and it will suck out the liquidity in the commodities market,” said Dorab Mistry, Director of Godrej International.

“Returns have to be higher than the rate of inflation. Therefore, bonds will tend to give higher returns. All those people who have found value in commodities will switch over,” Fry said on the sidelines of Globoil India 2013.

BIO-FUEL USE

Earlier, in his address at the business session, Fry said that currently, crude palm oil was being supported in South-East Asia, particularly Indonesia, through use as bio-fuel. “The use of palm oil as bio-fuel is helping it to rule at a small premium over Brent crude in Europe, though in Asia, it is at a discount to the latter,” he said.

Indonesia has announced plans to produce 3 million tonnes of bio-diesel next year and in 2015. This could provide support to prices of palm oil and other vegetable oils.

However, things could change if Brent crude oil prices drop.

“There are a few pointers to why crude oil prices will come under pressure.

The US is adding a million barrels to its supplies every year and shale gas is emerging as a real threat,” the expert said.

SHALE CONVERSION

Currently, the cost of producing shale gas equivalent to a barrel of crude works out to $20 in the US and $50 in Europe.

“There are plants coming up to convert shale gas into required fuel,” said Fry, adding that interest in using bio-fuel in the US and the EU is waning.

With palm oil heading for peak production season, its stocks could rise to 2.2 million tonnes by November-end and it would not reach last year’s level of 2.6 million tonnes.

Crude palm oil could rule between MYR 2,250 ($710) and MYR 2,500 ($790) a tonne towards the year-end, while rapeseed, sunflower and soya bean oils could drop to lower than $1,000.

Meanwhile, during a price outlook session at the meet, soya bean production in the country was estimated between 110 lakh tonnes and 140 lakh tonnes.

While some experts put it at the lower end, others such as Atul Chaturvedi, CEO, Adani Wilmar, pegged it at the higher end.

Soya bean oil prices could drop by Rs 20-40 for 10 kg, while soyameal prices could also fall to levels of Rs 31,000 before the year-end.

“Once the tapering happens and interest rates go up, money managers and hedge funds will switch over to other gainful investments such as bonds,” said James Fry, Chairman, LMC International, London.