Impact of Brexit on Indian Commodity Market


Indian Commodity Market

The much awaited, anticipated and feared outcomes of Brexit are still on speculation as the world intelligentsia ponders upon the plausible effects on various large and minor economies around the world. For India the effects are varied generating some positive as well as negative impacts. Depending upon your industry you can expect the wave to hit accordingly.  Let us have a brief look at the impacts of Brexit on the Commodity market of India.

 

Immediate Impact on Commodity Pricing

 

With Brexit, the commodity price recovery has hit a big bump in the recent months. The Bloomberg Commodity Index experienced an increase by 13.4% as on 23rd of June since 1st of January. According to Bloomberg, Brent crude saw an increase by 37%, Industrial Metals saw an up by 9.5%, and S&P GSCI Agriculture index was also up by a percentage of 14. But then on 24th June they went down in different percentages, like the crude oil had suffered a 5.2% gradient decline. The Bloomberg Commodity Index went down by 1.4%.

 

Effect on the Global Economy

Brexit's Impact on the Global Economy

One of the most easily felt impact was that the US dollar showed appreciation which is directly linked with commodities that have very strong links with the financial markets. And they weakened because as money moves towards the appreciating dollar, commodities suffered a new low.

Central Bankers and government in the EU will definitely keep taking measures to counter the adverse waves of Brexit. Further rate hikes will be postponed by the US Federal Reserve which in turn would have currency movements influenced, and that would in turn affect the prices of commodity all over the world and India shall also bear the brunt of the same. Economy of UK is also expected to weaken, due to the increasing of its demand for commodities. Not only UK but the economy of EU itself can get affected which happens to be one of largest consumer as well as producer of various essential commodities.

There is a lot of uncertainty due to the recent turn of events in Britain. China’s economic growth which has seen a slump over time comes as a huge concern. Commodity prices may further tumble if news flows from these sources and they keep clouding the outlook for commodities. This can really affect commodity producing nations and producers.

 

Impact on Gold

 

Investors at such point will seek refuge in a safe haven assets and nothing can be better than gold for investors. In India gold prices were seen to shoot up on 24th June by 6% and 4.2% versus the US dollar. In fact at one point of time the percentage rise seen was as high as 8.1%, the highest rally since the year 2008. In a period of likely prolonged uncertainty as other European nations may get tempted to follow the footsteps of UK the outlook for the shiny yellow metal appears bullish. The probability that US will bring about hike in rates before December have also gone down close to zero. This can be another boost for the prices of gold since the opportunity cost of holding gold increases with rate hikes.

 

Impact on Metals

 

The biggest loser among metals companies that was anticipated long time back that would suffer the setback of Brexit, Tata Steel Ltd’s stock got plummeted by 6.37%. In the financial year 2016, EU was responsible for 57.5% of the revenue. The foreign currency debt is also of sizeable amount on its books which acts like a catalyst for currency risks.  But then Tata Steel is not alone in the struggle, even Hindalco Industries Ltd’s shares saw a decrease by 5.17%. Via its subsidiary Novelis Inc which is into the production of value added aluminium products it has a direct and significant exposure to EU.

There are many more firms from India that will suffer the setback but will experience an indirect setback like the Steel Authority of India, Hindustan Zinc Ltd, JSW Steel Ltd, and Vedanta Ltd. A slide in the prices of the metal is bound to create unwanted ripples. The more popularly traded base metals in the financial markets like copper, zinc and aluminium may take a further beating as risk associated with the strengthening of the dollar due to Brexit is inevitable.

 

Impact on Crude Oil

 

Another important commodity that has seen a very sharp downfall is the Brent crude oil. Considering the huge import requirements of India the positive side of lower crude oil prices will be of benefit. But then with the continuity of persistent pressure on the prices the anticipated inventory gains will be significantly lower than that which is expected for the June quarter for Refining and Oil Producing companies that are state-run such as Indian Oil Corp, Hindustan Petroleum Corp. and Bharat Petroleum Corp.

But then this crude oil prices going low is negative for oil producing companies at the same time like Oil and Natural Gas Corp. Ltd, Cairn India Ltd, and Oil India Ltd. On the other hand analysts have predicted a very strong dollar versus the Indian rupee to turn positive for the earning of the Reliance Industries Ltd. (RIL).

Apart from commodity market news, there are other sectors that have suffered big and small setbacks. Like the pharmaceutical Industry of India has not suffered a huge blow since their main market is US fortunately and not Europe and after that India ranks next.  The reason for uncertainties is mainly due to currency volatility that will have an impact on the trade agreements, company financials and whether UK as a nation will now have a completely different set of regulatory approvals even though having the EU approvals in place.

The largest infrastructure player of the nation that is Larsen and Toubro hardly has any exposure to projects in the European Union and hence a drop in the stock of the company is inevitable. But the trepidation felt by analysts is this that the cost of borrowing for the organizations may start showing an upward movement due to the volatile movements of currency in the near to medium term.

Any parent firm will be required to plan out their strategies on exports if they do exports to Europe through UK.

Many more ripples are yet to unfold in various industries and an ‘event’ like Brexit will take time to  check the eventual income in the near future.

 

 

 

Sources:                    Financial Express              Economic Times             LiveMint