Global prices for raw materials have been retreating for 15 consecutive months, giving international investors increasing concern for a possible commodity crisis, similar in fashion to a classic textbook overproduction glut. Amidst the shrinking international demand for manufactured goods and the resulting factory gate deflation in mainland China, the consumption side of commodity markets is faltering elsewhere, with major losses in energy, metals and mining industries. Even though the US Federal Reserve took their time over maintaining ultra-low borrowing costs, there are hardly any upside factors supporting prices on raw materials: the recent wave of devaluations across emerging markets has undermined any hint of a recovery anytime soon.
The benchmark international commodity contract is copper, and the dynamics in copper prices are often seen as a measure of future fluctuations of other commodity goods. Copper is one of the most in-demand industrial metals, and its price can be used to evaluate short-term developments in industrial nations: a rising copper price signals a rebound in global manufacturing, and when copper falls it indicates stagnation to contraction.
Now, in recent days copper prices have crashed below their 200-month rolling average: the metal is trading 2% below that, at a six-and-a-half-year low. The 8.8% slump in Chinese manufacturing profitability in August, reported yesterday, was the main drag across all commodity markets. December delivery contracts traded as low as $2.26/lb, compared to copper’s mid-2010 highs of $4.50/lb.
The demise of Glencore, one of the world’s biggest miners and commodity traders, also played a significant part in depressing commodity prices. Several other commodity companies suffered a blow to their market valuation, including the Asian raw materials trader Noble, down 11% to its 2008 level.
The Japan-based shipping company Daiichi Chuo Kisen Kaisha filed for bankruptcy on Tuesday. The company is unable to meet its creditors’ financial demands as the decline in commodity prices undermined the profitability of their entire business.
Another disturbing example is the global trading enterprise Louis Dreyfus Commodities B.V., based in the Netherlands, having reported a massive decline in profits in the first half of the year.
Consequently, prices continue their retreat. Bloomberg’s index of raw material prices including oil, gold and soybeans has slumped 50% since 2011 and is just below 90, after hitting a high of 175 in July 2011. Commodity prices seemed to start their rebound in the summer of 2014, however, the subsequent crash in crude prices and widespread political risks quashed any optimism.
The market situation is more of a confidence crisis: investors and traders believe that Beijing is able to fix their economy soon, and that the US Fed is seriously intending to hike borrowing costs. Whilst the US economy is expanding robustly, it is insufficient to support the entire global commodity market: the US is hardly a major raw materials importer. China is, however, meaning a recovery there is a necessary condition for a rebound in commodities.
In the US, meanwhile, the commodities sector is undergoing an ambitious transformation, which is best described as de-monopolization in an attempt of many major companies to lower their exposure to prices fluctuations. Alcoa, Inc., America’s largest aluminium producer, announced it would split into two separate companies as the overproduction affects its current cost-efficiency.
This is not yet a crisis, but things might deteriorate unless commodity producers manage to optimize their performance strategies.