One of the features of 2015 has been the fall in price of so many basic staples of life. By this I mean the price of energy metals and some foods. Putting it another way we have seen a sort of currency revaluation where most people can now buy more and often considerably more product for the same monetary outlay. This is certainly true for those who use the US Dollar and even the Euro’s fall has only offset part of it. This currency revaluation has spread to much of the world and only has a downside for those who are producers where places like Western Australia and the oil producers come to mind.
If we look at things this way and again look at the Euro area I note that Mario Draghi has again indulged in Open Mouth Operations to drive the Euro lower today and thereby offset some of the commodity price fall. Does anybody in authority even question the wisdom of this?
The price of oil
if there is an equivalent to “the spice must flow” theme of the novel Dune for the world economy it is the supply of oil. That is why so many wars have sprung up around the middle-east in recent times. However the latter part of 2014 saw a sea change in the pattern of the price of oil as it fell and fell to a nadir in Brent Crude Oil terms of just below US $50 as 2015 began. This was very different to the period where as we observed on here a Star Trek style tractor beam kept pulling it back to the US $108 level.
Whilst there have been fluctuations in 2015 we have seen a more stable overall pattern as well as lower low and we currently find Brent Crude Oil at the US $46 mark. This has driven both consumer and producer inflation lower and given the world economy quite a boost in 2015 even if we allow for the regions where it is a deflationary influence such as the Middle-East. Although in a theme for these times we have the question of why the world economy is not doing better and so many central banks are still running such an expansionary policy.
I pointed out earlier this week that the price of copper has been partying just like it was in 2009. The copper future followed by the Financial Times has fallen into the US $2.21s which means that it is some 27% lower than a year ago. For consumers this is again a clear gain especially for anyone looking for electrical wiring.
Underlying this has been the change in the Chinese economy where we see a very opaque picture. This as regular readers will recall is due to the collateralisation and financialisation of copper over there and likely hypothecation. Anyway with apologies for the salvo of long words in essence the financial market input has also driven the boom/bust cycle here. Along the way we see that copper was for a while a form of money just like white goods and cars did in Greece except that one became so in a boom and the others because of fears of a bust.
Dr. Copper has not lacked friends n its downwards journey. From Bloomberg on Tuesday.
Zinc for delivery in three months fell 2.3 percent to settle at $1,607 a metric ton at 5:50 p.m. local time on the LME. Prices touched $1,576, the lowest since July 2009 and are down 26 percent this year.
Only the day before Nyrstar had announced plans to reduce production of Zinc concentrate by 400,000 tonnes a year but as you can see it appears to have been a leaf in the wind. This morning markets were playing “And the beat goes on” by the Whispers according to Sober Look.
Spectacular selloff in industrial metals on the Shanghai Futures Exchange: aluminum, zinc, nickel, steel
The Commodity Research Bureau calculates a metals sub-index and it pushed above 1100 in the commodity boom of early 2011. Then it fluctuated over the next 3 and a bit years but drifted downwards into the 950s or so. But with a by now familiar sense of timing something changed in late July 2014 as “Down Down” by Status Quo became the musical theme as we note that the last reading was 562.49. Apart from one rally in late April this has been the sort of move that those who use trend charts must dream of!
The majority of people reading this- I mean those who are neither central bankers nor farmers- will be pleased to read that the price of foodstuffs has fallen too albeit not on the same scale as discussed so far. The peak was 513 in April 2011 and we now find ourselves at 358 with the majority of the fall happening since, surprise surprise, the summer of 2014. On that subject does anybody recall why food prices rose in early 2014?
Of course this does not always feed through into our pockets as the recent price increase by Starbucks in the UK showed. There are other influences.
Just when you thought that the Duke brothers Randolph and Mortimer were figments of a film-makers imagination what pops up? From Bloomberg.
Futures have soared 35 percent from a three-year low of $1.0345 a pound on Sept. 29 as investors weighed slowed demand against declining output. Brazil is the world’s top orange-juice producer, followed by Florida.
Yes forecasts from the US Department of Agriculture are involved as life imitates art. It gives me a wry smile to note that this is happening as Bank of England Governor Mark Carney mounts his PR campaign to tell us that all the past market rigging problems were misunderstandings and local difficulties and that it is different this time. Perhaps Mark would be better off ripping it up and starting again.
These indices are also hammering out a worrying beat. The Baltic Dry Index has halved since early August creating quite a severe bear market. Whilst it is a volatile measure a fall from 1201 to 599 does create food for thought as does the fact that it is down over 50% on this time in 2014. If we move to the more stable Harpex Index we see that 394 has replaced the 646 of the summer.
It is easy to sing along with REM after noting the developments in commodity prices.
It’s the end of the world as we know it
It’s the end of the world as we know it
However there are ameliorating factors if we look at what created the commodity price boom. China decided to go on a commodity buying warpath pushing prices higher. In addition to that bank trading desks thought if the Chinese want to pay up let them and drove prices even higher. Hence we had something of a false boom and now as well as the Chinese slow down we are seeing banks exit the market as the easy money has gone.
In this I see a genuine danger which is not the deflation mania in much of the media. It is that in spite of the protestations of regulators and central bankers there are many derivative positions still around and the one thing that writers of such positions do not like is extreme volatility. If you are looking for a canary in this particular goldmine may I suggest noting developments like this from the Financial Times.
Glencore shares on the wrong side of £1 again