What are falling commodity prices telling us about the world economy?

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.

Dr Copper

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.

Other metals

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!

Food

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.

Trading Places

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.

Shipping

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.

Comment

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

Advertisements

21 thoughts on “What are falling commodity prices telling us about the world economy?

    • Hi therrawbuzzin

      I thought I would reply to your point below by saying that in the process of sorting out my father’s financial affairs on her behalf my mum passes nearly all the financial post to me. This week’s included exactly the sort of offer you have written about on here from Virgin Money if I remember rightly. I meant to post it on here but annoyingly left the paperwork at her house by mistake.

  1. By the way, I got ANOTHER reminder from Tesco bank this morning, that I could borrow up to 95% of my credit limit on my eight year old credit card, (£9.5k) at 0% (2.99% handling fee) for 16 months.

    • you must be on some mailing list

      I too have ISA and credit cards ( yes even Tesco’s ) and the bu@@ers dont write to me !

      Forbin

    • I just received an e-mail from Barclay card saying their credit interest rate is going to start tracking the minimum lending rate (MLR) plus a set margin! I’m taking this as strong anecdotal evidence that the MLR will start increasing in the next 6 months .

      • I just got this e-mail from Virgin Money at 17:00 today:

        Dear Alan,

        We would like to remind you of new promotional rates that are currently available for your Virgin Money Credit Card ending XXXX.

        0% interest until your July 2017 statement on all new balance and money transfers you make between now and 30 November 2015.

        Three key things to know


        Our handling fees – 3.5% (min £3) will be applied to all balance transfers and 4% (min £3) for money transfers made before 30 November 2015.


        Your rate – after the promotional period ends, any remaining transferred balance will be at your standard interest rate, which you can find on your statement.


        The terms – we will withdraw the promotional rate if you don’t stick to the terms of your credit agreement (e.g. you miss a payment or go over your credit limit).

        Remember


        Credit limit – you can transfer up to 95% of your credit limit minus your outstanding balance(s) and excluding fees.


        Card purchases – you can only enjoy interest-free card purchases if you pay the full statement balance each month, including any money or balance transfer amounts. If not, interest will be payable.

        Ready to make a transfer?
        Go to myvirginmoney.com/transfers to find out more and to make a transfer or call us 24/7 on 0800 011 3210 .*

        Thank you for being a Virgin Money customer.
        _______________________________________________

        I’ve had this card approx. 10 years.
        My credit limit is £10.5k

        • they want you to transfer and forget

          I think you’ve figured that out before

          hoiw can they make money otherwise – teaser in , bang on the head later on

          Forbin

        • Forbin, I’ve been doing this for ten years.
          I’m meticulous in avoiding their punitive interest rates, and although juggling for ten years have never paid a penny. They MUST know this.
          The next balance transfer I need to pay off is by 1/3/2016.

          By the way, I’m not wealthy by British standards, it’s just that what I have is very liquid, and that’s not buy chance.

          Cash Isas offer little benefit to me, as a carer, because my income being £62.10 per week, I can make £7k in interest before income tax.

      • Hi Noo2

        One of the things that have made something of a joke of the ZIRP or strictly speaking 0.5% interest-rate in the UK has been what interest-rate credit cards charge. Here is the Bank of England view on September.

        “The credit card rate (all balances) increased to 10.53%, a 12bps increase on the month “

    • If is bizarre isnt it, when there is so much debt and so much leverage the wall of money just keeps coming. I was given £15k by Sainsburys today at 3.4%, I believe I can get 3% in some banks accounts so how cheap is money today?

      • Hi Paul C

        You did well as having just looked up some numbers to reply to Noo2 I saw this in the September Bank of England bankstats.

        “The rate on outstanding unsecured personal loans decreased by 5bps to 6.84% in September and the new unsecured personal loan rate increased by 1bp to 6.98%”

  2. Great column, Shaun, as usual.
    You wrote: “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.” It is good of you to remind your readers that even in oil-exporting countries the drop in the oil price only hurt certain regions and not others. Canada had two quarters of negative growth in the first half of 2015, but for the bulk of the population living in central Canada, there not only wasn’t a recession, there wasn’t even a single quarter of negative growth. Both Ontario and Quebec economies were flat in 2015Q1, with positive growth in 2015Q2. I believe these are the only provinces that still produce quarterly growth estimates (Alberta eliminated theirs some time ago) However, the Bank of Canada has suggested based on sub-annual growth indicators that are available for all regions that the recession may not have extended beyond the three main oil-producing provinces of Alberta, Saskatchewan and Newfoundland and Labrador.

    • Hi Andrew and thank you

      The exploitation of a natural resource has all sorts of consequences which are not easy to measure. Some are clear such as the currency tends to rise as we saw in the commodity boom with the Loonie and the Aussie Dollar. Back in the day North Sea Oil & Gas did the same to the UK Pound £. We have an idea that this affects the DNA pool if I may put it like that as talent moves to well paid jobs in that industry. But how much it affects the overall economy is hard to say in many respects especially as it tends to be in isolated places. Even in the relatively congested UK the oil and gas boom centered on Aberdeen which is far away from most of the population.

      My point is that we know much less than we like to think that we do. If today’s trend for lower commodity prices continues however we may well be about to receive something of an education.

  3. Hello Shaun

    Perhaps the world is now stuffed with plastic pig fridge magnets and Salad shooters ?

    Seems to me that the western economies are petering out as , well, we dont actually make anything any more , except paper promises and inflated house bubbles !

    Once you factor in poor wage growth over the years and inflation in food ,etc , ( fees for university ?) we the people have little left over

    and those figures about comodities are as you imply , hot money from the Banks pulling out …..

    With us the BTL have been driving housing higher , you posted it yourself 80% bank lending to BTL ….. not home owners ( the Bank do love their bricks and mortar ) . This seems to me that the more money you push into fewer and fewer hands , the less the rest of us have to spend

    And if the majority of us cannot spend in a service economy ?

    you’re right its going to be a slump , maybe even recession and for the climate a depression would help 😉

    Forbin

    • “…80% bank lending to BTL”. I don’t know the breakdown between bank lending to BTL and Building Society lending to BTL but BTL supposedly has 18% of new total new mortgages – http://www.cml.org.uk/news/press-releases/septembersecond-quarter-press-release/

      I don’t share your pessimism Forbin,. This is a correction as the commodity market adjusts to China’s re balancing towards a more services led economy, an adjustment which will continue for many years to come. The miners will have to adjust output accordingly unless India takes the baton from China over the next 10 years.

      • Shaun, thank you for your interest. Opinion about the pipeline was pretty evenly divided in Canada. A December Nanos survey showed 48% of Canadians in favour and 46% against. The Conservative and Liberal parties were in favour during the election, while the NDP and the Green Party were opposed. The separatist Bloc Québecois refused to take a stand on Keystone since the pipeline didn’t involve Quebec, but made it pretty clear they didn`t like it. They have opposed the Energy East pipeline crossing Quebec to take Western Canadian oil to Atlantic ports.
        Here is a link to a Globe story on the cancellation. It includes this quote from the former CEO of TransCanada Corpn: “This is very difficult for the Canadian oil and gas industry. And access to market is the single biggest problem we face. In many ways, it is even bigger than $45 oil. Forty-five-dollar oil will come and go as global supply and demand sorts itself out. But if Western Canada can’t get access to markets, and we persist with things like dangerous rail transportation, it is just bad.”
        http://www.theglobeandmail.com/report-on-business/industry-news/energy-and-resources/keystone-xl-pipeline-rejection-sends-a-chill-over-canadas-energy-industry/article27163985/

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s