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Fed tapering may impact commodity prices

The turmoil in some Asian currencies created by the likely tapering of monetary stimulus in the United States is likely to spill over into commodity markets.

While it's obvious that as a currency depreciates, the local cost of commodities, which are normally priced in U.S. dollars, increases.

But what is less obvious is what the impact will be on the supply-demand balance for various commodities.

Take crude oil and coal for instance.

Both are major sources of energy, priced in U.S. dollars and easily traded.

But for many Asian countries, the price of oil has risen dramatically this year, while that for coal has remained steady, or even declined.

The focus has been on India in recent weeks, given the South Asian nation's efforts to stem the slide of the rupee, which has lost some 23 percent of its value against the U.S. dollar this year.

Brent crude is now at record highs in rupee terms, and is 26 percent above the level that prevailed at the start of the year.

Given that crude is India's biggest import in value terms, it's clear that the government will want to spend less on oil in order to lower the current account deficit.

While stabilising the currency will certainly help, it's also likely that the government will be forced to raise retail prices in order to crimp demand.

This will likely have unpleasant economic and political ramifications, but they key point is that from an oil demand perspective, India's growth may disappoint this year.

However, India is also a major coal importer, and here the story isn't nearly as bad.

The spot price of coal at Australia's Newcastle port , an Asian benchmark, has dropped almost 15 percent since the start of the year to $78.61 a tonne in the week to Aug. 30.

This depreciation in U.S. dollar terms has limited the increase in rupee terms to just 2.2 percent for the year, although rupee prices are currently 12.8 percent above the low for the year, reached in late July.

But compared to oil, coal consumers in India are relatively better off, and may be able to continue to import the fuel.

India, the world's fourth-largest coal importer, bought 75.73 million tonnes of coal, a jump of 28.3 percent from the same period in 2012, according to Reuters data.

The lower coal costs are also helping Asia's major producers keep their heads above water, albeit only just.

In Indonesian rupiah terms, coal prices are 3.4 percent weaker now than they were at the start of the year, which means miners haven't lost too much revenue through currency depreciation.

However, the situation in the world's largest exporter of thermal coal has improved in recent weeks, with rupiah prices gaining almost 12 percent since the year's low on July 5.

It's even better for Australian producers, with coal prices down only 0.7 percent since the start of the year in local currency terms. They have risen 5.5 percent in Australian dollar terms since the year's low on Aug. 9.

However, even at the current Australian dollar price of A$88.36 a tonne, many miners will be struggling to remain profitable and the industry is rife with cancellations and delays to new mines or expansion projects.

The higher oil cost is also a negative for Indonesian and Australian miners, given the reliance on diesel for power at many remote mine sites.

While Indonesian fuel consumers have yet to see rising retail prices, it's likely this will come as the government will be reluctant to spend more money on subsidies.

Australian consumers aren't so lucky, with domestic fuel prices rising in tandem with movements in global crude benchmarks, and with Brent now at the highest since September 2008 in Australian dollar terms, retail prices are nearing all-time highs.

This is likely to act as a drag on demand for diesel, which in turn may impact on some of the region's refineries, especially those in Singapore, as Australia is now one of Asia's biggest diesel importers.

Oil demand may also come under downward pressure in other major Asian importers, such as Japan and South Korea.

Crude has gained 11 percent in Japanese yen and 6.4 percent in Korean won terms since the start of the year.

However, coal is 2.8 percent cheaper in yen and 11.4 percent cheaper in won, making it likely that both countries will favour increased coal-fired generation in coming months.

And what of China, the world's largest commodity importer?

Even though the yuan is down only 1.76 percent against the U.S. dollar since the start of the year, the same dynamic is at work with crude oil and coal.

In yuan terms, crude is up 1.75 percent so far this year, while coal is 16.3 percent cheaper.

While the increase in oil prices isn't significant enough to impact demand growth, the decrease in coal is sufficient to keep imports in the picture for Chinese buyers, even though domestic coal prices have also been weakening.

It may never have crossed Ben Bernanke's mind, but the signals that the U.S. Federal Reserve's quantitative easing programme is

likely to be scaled back soon could end up boosting coal demand and crimping oil consumption across Asia.

Source: Reuters