1. Commodities to lie low for a while

Commodities to lie low for a while

The latest commodity crash may just stretch longer than the one during the global financial meltdown of 2008, reports Banikinkar Pattanayak in New Delhi.

By: | New Delhi | Published: August 26, 2015 12:39 AM

The latest commodity crash may just stretch longer than the one during the global financial meltdown of 2008, reports Banikinkar Pattanayak in New Delhi. This is because China, which stimulated commodity demand when growth in developed nations sputtered seven years ago, has substantially lower capacity to do so now, with its economy looking down. That China’s share in world production and consumption in most commodities has risen steeply since then makes the commodity markets more vulnerable to the vicissitudes of the world’s second largest economy this time around.

In the case of steel, iron ore and aluminium, China scaled up its capacity to produce almost a half of the global output.

With China in deep trouble now and growth momentum in developed nations hardly enough to make up for lower Chinese appetite for raw materials, considering the not-so-bright GDP outlook offered by the International Monetary Fund, the problems for commodities don’t seem to evaporate anytime soon.

Gr2

Given the opaqueness of the Chinese financial system and the growing question mark over its resilience to absorb structural shocks, it’s only fair to assume the world’s second-largest economy is unlikely to play the saviour of commodities this time around. China is already forecast to grow at just 6.8% in 2015, compared with 7.4% in 2014 — its slowest pace since 1990 — and the global economy is expected to expand at just 3.3% for the year, even below 3.4% a year before.

The plunge, however, is good news for a net commodity importer like India — which buys items including crude and edible oils, gold and fertilisers in large volumes, although the latest depreciation of the rupee against the dollar may keep a lid on such gains.

Already the Bloomberg Commodity Index, which tracks the price movement of 22 items, hit its lowest in 16 years on Monday. Although the index recorded a roughly 50% plunge between its 2011 high and now, its is fall still lower than its decline during the global financial meltdown of 2008 when it lost 57% between its peak in July 2008 and the low in March 2009 (after which it started inching up steadily). However, given that the World Bank has forecast another year of falling commodities in 2015 and many analysts predicting a further plunge in base metal and even gold prices, the outlook for commodities doesn’t look encouraging, even though analysts don’t see a repeat of 2008 now despite the weakness in the Chinese economy. This gives adequate indication that the commodities are in for a real hard landing for a little longer.

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