Daily Update: June 21, 2024

It's hard not to be awed by the scale of it all. India, the world's largest democracy and fifth-largest economy (for now — the International Monetary Fund reckons it will overtake Japan next year) recently held its biggest election ever, with 980 million eligible voters deciding all 543 seats of the Lok Sabha, the lower chamber. 

The results were declared June 4, with Prime Minister Narendra Modi winning a third term in office. But there's a twist: His Bharatiya Janata Party (BJP) no longer has an absolute majority. The Hindu nationalist BJP won 240 seats, 32 short of the crucial simple majority mark, but with a further 63 seats won by its 35 coalition partners. 

The National Stock Exchange of India's Nifty 50, an index of the country's top 50 companies by market capitalization that are listed on the NSE, had the largest daily fall since the first COVID-19 lockdowns in 2020 but then quickly recovered. For commodities, however, reaction times and timescales are much longer, so it is interesting to think about some of the election's ramifications.

Prior to the results, S&P Global Market Intelligence analysts assessed the likely impact of three scenarios: a BJP coalition victory with a special majority of two-thirds of the seats; a BJP coalition victory with a simple majority; and no overall majority for any party. Under the simple majority coalition scenario that came to pass, the analysis said Modi would still concentrate on macroeconomic growth and fiscal prudence but, given a weaker mandate, might have to focus more on welfare. More importantly for the commodities space, the analysts projected increased competition between state governments for marquee projects that might attract foreign investment. 

Expect plenty of jostling at the feeding trough, as multiple industries and projects require governmental aid. Due to the demand pull of India's focus on infrastructure, manufacturing and construction to stimulate growth, the country's large iron ore mining and steel industries are supported in the medium term. But there are structural weaknesses. At present, almost 20 million metric tons of iron ore, mainly lower-grade, is exported, almost all to China. This is causing price volatility and some calls for an export ban. A possible long-term solution is subsidies to build more beneficiation plants to increase ore quality and ensure domestic supply and a greater premium on any exports. 

Elsewhere in the steel industry, India's increased steel demand and governmental policy to reduce greenhouse gas emissions by using scrap steel will increase imports of coking coal and ferrous scrap. The latter have been rising sharply since 2021. And more electric arc furnaces need to be built, again requiring major investment.

Another arm of India's GHG emissions reduction program is its aim to be a key player in Asia's biofuels sector. A current barrier is a shortage of ethanol feedstock, exacerbated by high food inflation, resulting in more sugarcane being reserved for food use. Meanwhile, cost-sensitive domestic airlines have had little appetite to date for sustainable aviation fuel. To accelerate the transition would require — you guessed it — central government intervention and/or subsidies.

Food inflation is also heavily impacting food commodities flows. India is the world's largest rice exporter and briefly became a key wheat supplier when the Russia-Ukraine war disrupted Black Sea wheat. But in the face of rising domestic prices, which have previously triggered social unrest, the government has strictly controlled exports. All eyes are now on the monsoon harvest, which could lead to an easing of rice export restrictions, with Africa as the primary destination. Wheat exports are unlikely to restart soon, as the government is rebuilding reserves. 

Turning to India's oil industry, the sector most connected with geopolitics, domestic upstream operations in India are low-level and would require significant investment to ramp up and thus reduce reliance on imports while the country's hydrocarbon demand accelerates rapidly. And, of course, there is the added difficulty of achieving this while also cutting emissions.

International sanctions imposed on Russia following its invasion of Ukraine have resulted in changes in oil flows. Russia's share of India's imports rose to almost 40% in 2023 from about 5% in 2019. India's traditional partners have been the Middle East and the US, and it may find that maintaining strong diplomatic relations with them and Russia simultaneously is difficult. Adding to the complication, the Russia-Ukraine war and wider repercussions of the Israel-Hamas war could interfere with supply.

Today is Friday, June 21, 2024, and here is today’s essential intelligence.