Analysts believe that a drop in commodity market prices means a drop in the economy as well
Commodity prices such as crude oil and iron ore have fallen this year, underscoring the ongoing economic slowdown around the world and possible risks of a recession, CNBC reported, citing comments from market analysts.
Over the past 12 months, global commodity prices have fallen more than 25%, as reflected by the S&P GSCI Commodities Index, a gauge measuring the broader performance of various commodity markets.
Among the various baskets of commodities, the price of industrial metals was seen down by 3.79% in the period (till June 30), while energy commodities such as oil and gas fell by 23%. On the other hand, agricultural commodities such as cereals, wheat and sugar have increased in price by approximately 11%.
However, the overall decline in the index likely points to a global economic slowdown and recession, analysts say, as China’s post-pandemic economic recovery loses momentum.
“Iron ore and copper are good barometers for highly cyclical sectors of the global economy, including construction and manufacturing, which are in recession in many places,” Kpler senior commodities analyst Reid I’Anson said in an email.
“I believe this downturn will lead to a broader one in economic activity, particularly in the West,” I’Anson added.
He predicted that the US would likely report a decline in gross domestic product (GDP) in the fourth quarter of this year or the first quarter of 2024, with Europe following suit three to six months later.
“The failure of the Chinese economy to live up to market expectations is the main reason why commodity markets have struggled to find solid footing,” I’Anson continued.
China released a series of economic data that were weaker than market expectations and that illustrated the country’s tentative opening after several years of Covid lockdowns. Bank of America analysts confirm that China’s recovery is weaker than expected.
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“Especially in real estate, investment is down 7% year-on-year,” said Matti Zhao, the bank’s head of commodities, oil and gas research in the Asia-Pacific region.
A weakening property market is often associated with weaker demand for construction materials such as steel, aluminum, copper and nickel.
According to Wall Street banks, the downturn in China’s real estate sector will continue for years. And the Chinese government doesn’t seem ready to pursue an aggressive stimulus package, I’Anson said. Even if it does, “it will have to be massive to impress the markets at this point,” the expert added.
Who are the biggest losers and what does that mean?
While commodity prices such as agricultural produce rose as the El Niño weather phenomenon worsened crop prospects, energy sources and industrial metals traded much lower.
Among the biggest losers in raw materials are iron ore and oil, analysts agree. Kpler also cited the unfavorable outlook for copper, which plays the role of an indirect economic indicator because of its wide application in the field of electrical equipment and industrial machinery.
Oil fell sharply, with the price of global benchmark Brent down 34.76% year-on-year, even though OPEC measures to cut production are now in place.
Weak energy consumption in Europe, partly due to a warm winter, pushed EU gas stocks to their highest levels in five years and pushed prices down, Zhao said. In addition, the world’s largest oil importer, China, is boosting coal production amid the power crisis.
That being said, in the event of extreme cold, energy prices may recover in the second half of the year, Zhao predicted.
According to BofA, average steel and iron ore prices have fallen 16% year-to-date since the start of the year amid weak construction demand. Weak demand in the sector is also affecting other construction materials such as cement, whose stocks have reached a level of 75%.
Iron ore is primarily used to produce steel, which is an important material in construction and engineering projects.
Oil posted the biggest drop among commodities
“Commodity prices such as industrial metals tend to move lower ahead of the release of leading economic indicators such as the PMI and have historically been used as an indicator of a potential downturn,” said S&P Dow Jones Director of Commodities and Real Assets Indices, Jim Wiederhold. He added that there is a tendency for oil to “decrease dramatically” when there is an economic downturn.
“Overall, prices for many of the major commodities have declined over the past few months as demand from companies and consumers has been weaker amid a potential recession,” he said.
Commodity prices also tend to move in line with inflation, Wiederhold continued. And if inflation continues to slow, commodity markets could see further price declines in the short term, he concluded.
According to the International Monetary Fund, global headline inflation is on track to slow to 7% in 2023 from 8.7% in 2022.
“Given that commodities are a good early indicator, I would say that prices are likely to struggle to find a stable footing until next year,” I’Anson commented.
2023-07-06 17:12:00
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