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Higher commodity prices to keep Pakistan’s balance of payment under pressure

At present Pakistan faces two contentious problems, depreciating currency and rising inflations. Both the issues are badly intertwined and cannot be separated. The hike in the international prices of energy and food products also erodes foreign exchange reserves of the country. It is must that policy planners keep an eye on the movement of commodity prices to minimize the adverse impact of the hike. There are many tradeoffs available, but only timely decisions can help.

Rising crude oil

Major crude benchmarks witnessed up swings, but prices are still hovering near/below levels seen last year. Sanctions imposed by the United States on Venezuela and Iran kept crude prices on the higher side. On the flipside, calls from President Donald Trump to Saudi policymakers to keep crude at lower levels could come up for discussion at OPEC’s ministerial meeting in April. Any decision by the Saudi’s to expand on previous output curbs could sway the US government in granting waivers granted to major Asian buyers of Iranian crude (due for renewal in early May), effectively keep a ceiling on prices.

Slowdown in coal prices

Richards Bay coal prices during the month averaged at US$84.4/ton, down 7.9%MoM, as the expectations of global economic slowdown loom large over the prices while the decline in Chinese imports on the back of lunar year holidays also played a part. Moreover, China’s coal imports declined to 17.6 million tons from 33.5 million tons due to the lunar year holidays while uncertainty persists over government’s policy regarding imports as it looks towards supporting local industry. Moving forward, Chinese demand still hasn’t picked up pace after resumption of business post lunar year holidays while clouds of uncertainty surround the outcome of US-China trade talks thus pressure on coal prices is expected to remain in near-term.

Firm fertilizer prices in local market

International prices of urea declined 10%MoM to US$238 per ton, and were down 12%CYTD, mostly as seasonality kicks in coupled with 8% MoM decline in coal prices (used as fuel stock in China). In the local market, prices remained firm at Rs1,740 per bag, with dealers pocketing higher margins due to minimal urea inventory in stock. The local urea prices may likely stay unaffected by the down trend internationally due to different demand supply dynamics and stable price of feed and fuel stock. Furthermore, the international urea price despite a decline, still translates into landed cost of over Rs3,000 per bag, implying significant 72% premium over local prices. The government would have to weigh its options of importing urea or supplying LNG to fertilizer plants to manage the local demand supply dynamics, where latter is economically more feasible.

Cotton outlook uncertain

Average international cotton prices declined marginally. However, a larger decline in global consumption of 2.0 million bales caused the price decline. Domestic prices however remained largely unchanged, averaging at Rs9,464 per 40kg, with limited trading activity. Going forward, price outlook is uncertain and largely dependent on how the trade dispute between the US and the China settles. News flows emerging from the latest round of negotiations suggest some easing of tension between the two economic giants, with US announcing a delay in a scheduled increase in tariffs on Chinese goods.

 

Steel prices on the recovery

Reversing their declining trend witnessed in the last few months, steel prices staged recovery on a relatively tight supply and expectations of the demand rebound. Looking ahead, steel prices could continue their upward trend in the near term amidst tight supply and demand euphoria. In the longer run, weak global economic outlook as reflected in recent IMF’s forecasts would have subsequent spillover effects on commodity prices particularly steel.

Competitive edible oil market

The higher palm oil prices are due to higher biodiesel consumption in Indonesia and Malaysia. Malaysia has switched its fuel stations to B10 biodiesel from B7 diesel blend, using more palm oil in the transport industry. In this backdrop, world palm oil stocks could fall up to 1.5 million tons in 2019 from current stock level of 3.5 million tons. Considering stable B20 and B10 biodiesel mandates by both Indonesia and Malaysia. It could also offset potential drop in EU demand due to environmental concerns. Higher palm oil prices would have negative implications for Pakistan consumers (such as EFOODS, FFL, UNITY) due to competitive pressures hampering their ability to pass- on cost inflation.

Way forward

Upcoming meeting of OPEC members during March to review output curbs imposed in January 2019 and conclusion of US-China trade talks remain near term inflection points. Commodities prices are likely to remain burdened by global economic fragility, where recent macro indicators and ‘patient’ central banks stress intertwining cyclical and structural impediments. Moreover, China’s latest growth outlook of 6-6.5%, lowest in more than 30 years is likely to be mirrored by decelerating demand from the world’s largest commodity importer.

Pakistan imports around US$2.5 billion worth edible. This can be saved by offering right incentives to growers of edible oil seeds i.e. sunflower and canola. It will yield two benefits: 1) reduction in import bill and 2) facilitation of farmers in boosting their income. Similarly, boosting cotton output will help in restoring competitiveness of the manufacturers of textiles and clothing. Running urea manufacturing plants at optimum capacity utilization can also help in boosting export of urea as its cost of production, despite using LNG; will still be lower as compared to its international prices.

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