AKD Securities Limited Equity Research – Daily Report

Karachi, June 19, 2018 (PPI-OT): Pakistan Commodities: May’18 Review

Pushed up by increasing energy prices, the TRJ commodity index ended 0.43%MoM higher during May’18. In this regard, major oil benchmarks, WTI/Brent/Arab Lite were up 5.47/7.36/8.19%MoM on Trump renouncing from Iran’s nuclear pact, geopolitical instability and declining US inventories. The price trend in other major commodities also followed an upward trend with coal (+9%MoM on strong demand across North Asia and China in particular with an early summer heatwave driving up electricity demand), urea (+8%MoM on higher demand commitments from Brazil and Asia) and cotton (+2.2%MoM on account of renewed buying by China) leading the price chart. Undeterred by the protectionist measures taken across the world, steel prices have so far remained firm on account of robust Chinese demand. Going into Jun’18, oil producers meeting (scheduled on Friday, June 22’18) regarding extension of the agreed supply cut holds significant importance with implications spilling on to overall commodity price trend.

US sanctions driving oil prices: During a month marked by geopolitical instability and shedding US inventories, oil benchmarks WTI/Brent/Arab Lite rose by 5.47/7.36/8.19%MoM averaging US$70.1/77.3/75.1/bbl. Major events driving the bullish trend included Trump renouncing from Iran’s Nuclear pact (JCPOA). Also, traders took bullish bets on oil as Venezuelan election resulted in US imposing even more sanctions on the country whose oil output level has decreased dramatically from ~2mbpd to ~1.4mbpd. As a result, oil prices went soaring to their highest level since Nov’14 (where Brent touched US$80.5/bbl), with consistently falling US crude oil inventories (down 4.9mn bbls over the month). However, pressure eased later in the month as OPEC and Russia both considered adding 1mbpd to the market to fill the vacuum created by Venezuela and the forthcoming Iran supply disruption. The outgoing month also witnessed increasing divergence between WTI and Brent (~US$10bbl) as US oil exports climbed up to a record 2.03mbpd, with an increasing portion going to the Asian markets. Going forward, OPEC meeting scheduled on Jun 22’18 will likely drive the oil price movement. On the domestic front, refinery spreads succumbed to higher oil prices (and freight charges) as product prices remained tied to their previous month levels.

Coal prices hit new highs: Int’l coal prices heats up again in May’18 (+9%MoM/40%YoY) to avg. US$102.0/ton on strong demand across North Asia and China in particular, as an early summer heatwave drives up electricity demand for air conditioning and industrial cooling. Uncharacteristically, heating commodity is still up 40%YoY to currently stand at US$106/ton (in Jun’18), a level last seen during early 2012. Going forward, Global coal prices are expected to remain elevated throughout 2018 owing to stable demand from China and increasing consumption in India (soaring demand from its power generation sector and lower-than-expected domestic production).

Urea prices rise again to stand at US$240/ton in May’18: After dropping by almost 14% since Feb’18, int’l urea prices in May’18 rose 8.1%MoM to stand at US$240/ton. The global urea market is building on recent gains, with prices increasing further as producers have committed most of their Jun-Jul cargoes on strong demand from Brazil and Asia. Urea prices remains very strong compared to a year ago, where the prices are almost up 43%YoY. On the domestic front, local prices are currently enjoying their continuous upward trend and are expected to remain strong on the back of: 1) lower inventory levels (high demand against low production), and 2) elevated landed cost of imported fertilizers, currently hovering around PkR1850-1950/bag (owing to higher int’l prices along with sharp PkR depreciation against US$).

FAO Dairy index continues to rise steeply: Rising for the fourth consecutive month, FAO dairy index averaged 215.2 points in May’18, up 5.5%MoM. The increase in index was primarily on account of higher price quotations of cheese and skim milk powder led by tight supplies in New Zealand, the leading exporter of dairy products.

Cotton moves up 2.2%MoM to ~4-yr high: The global cotton prices kept their upward trajectory during May’18 with benchmark ‘COTLOOK A’ index averaging out at USc94.24/lbs (+2.2%MoM/6.5%YoY). Prices across the world remained firm on account of renewed buying by China. Domestic prices, however, remained flat (+0.01%MoM) due to limited buying interest from domestic mills. As per latest USDA’s estimates, expected global cotton consumption/production in MY18 now stands at 125.4mn bales/120.4mn bales (-0.085mn/-0.79mn bales), which leaves world ending stocks of 83mn bales (-0.725mn bales). With cotton prices at a 4-yr high level, China’s decision to include cotton in the proposed items list that could potentially face higher tariffs has added another layer of uncertainty in the current volatile cotton market. Potential implementation on this front could reverse the current bullish trend in the cotton market.

Steel prices remain stable amidst robust demand: Steel prices remained firm during May’18 as healthy demand in the Chinese market kept prices at a higher level. Cold rolled coil (CRC) prices moved up by 1.2%MoM while hot rolled coil (HRC) gained 4.88%MoM as tight supply and firm buying interest prompted traders to raise prices. So far, protectionist measures across the world have failed to dent the bullish trend in steel prices mainly due to robust demand in China. Going forward, strong demand from both the stainless steel and automotive industry coupled with continued supply deficits are projected to support prices at the current level.

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