Impact of rising commodity prices on Pakistan economy

The total liquid foreign exchange reserves of Pakistan increased to US$16,798 million on 14th June 2018. The positive surprise was that the reserves held by State Bank of Pakistan (SBP) increased by US$198 million to US$10,264 million, due to official inflows. The break-up of the reserves was:-foreign reserves held by SBP were reported at US$10,264.3 million, while reserves held by commercial banks amounted to US$6,533.7 million. This may be a good omen but two questions continue to haunt the analysts: 1) can the country bank on borrowed US$ and for how long the country will keep on borrowing to pay off debts? If PKR continue to erode on the back of mounting current account deficit and eroding foreign exchange, It would results in 1) cost pushed inflation and 2) Pakistani manufacturers being rendered incapable of competing in the global markets.

Pakistan’s economy is commodity driven, be its imports or exports. Hike in energy prices not only erodes paltry foreign exchange reserves, but also results in cost pushed inflation. The international oil benchmarks, WTI/Brent/Arab Lite have been up due to the decision of the US President to disassociate from Iran’s nuclear pact, geopolitical instability and declining US crude oil inventories. The price trend in other major commodities also followed an upward trend with coal up 9%MoM on strong demand due to an early summer heat wave driving up electricity demand). Urea price increased by 8%MoM on higher demand commitments from Brazil and Asia. As against this, cotton prices increased by 2.2%MoM on account of renewed buying by China. Undeterred by the protectionist measures taken across the world, steel prices have so far remained firm on account of robust Chinese demand.

During the month marked by geopolitical instability and shrinking US crude inventories, the prices posted substantial increase. Major events driving the bullish trend included Trump renouncing from Iran’s nuclear pact. The hike was also supported as Venezuelan election led to the 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 November 2014, Brent prices touched US$80.5/bbl), with consistently falling US crude oil inventories. However, pressure eased later in the month as OPEC and Russia both considered enhancing output to fill the vacuum created by Venezuela and supply disruption from Iran. May also witnessed increasing divergence between WTI and Brent, exceeding US$10bbl as US oil exports climbed up to a record 2.03 mbpd, 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 rising to new highs also post a potential threat for cement manufacturers of Pakistan, already uncompetitive in the global markets. Global coal prices in May 2018 went up 9%MoM/40%YoY) to an average of US$102.0/ton on robust demand strong demand. Uncharacteristically, price of heating commodity is up 40%YoY to US$106/ton in June 2018, a level last seen in early 2012. Going forward, Global coal prices are expected to remain high throughout 2018 owing to stable demand from China and India. Soaring demand from India was from power generation sector and lower-than-expected domestic production.

Hike in international prices of urea is a good omen for Pakistani manufacturers. Urea prices rose to US$240/ton during May 2018. The global urea market is building on recent gains, with prices increasing further as producers have committed most of their June-July cargoes on strong demand from Brazil and some Asian countries, excluding Pakistan.. Urea prices remains very strong compared to a year ago, where the prices are almost up 43%YoY. On the domestic front, prices are also on upward trajectory and are expected to remain high on the back of: 1) lowering inventory levels due to robust demand, and 2) rising landed cost of imported fertilizers, currently hovering around Rs1850 to Rs1950 per bag (owing to higher international prices along with sharp depreciation of PkR against US$.

The global cotton prices kept their upward trajectory during May’18 with benchmark ‘COTLOOK A’ index averaging out at USc94.24/lbs, up 2.2%MoM/6.5%YoY to 4-year high. Prices across the world remained firm on account of renewed buying by China. However, domestic prices remained flat due to limited buying interest from domestic mills. As per latest USDA’s estimates, expected global cotton consumption/production in MY18 was reported at 125.4 million bales/120.4 million bales, which leaves world ending stocks at  83 million bales. With international cotton prices at a 4-year 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. Since over 60% of Pakistan’s total proceeds come from textiles and clothing, boosting exports to bride the mounting current account deficit will not be an easy task,

International prices of 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 from 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 levels.



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