The Commodities Crash ....why it's important, and not just to commodities traders

Tuesday 21st July 2015

The Commodities Crash ....why it's important, and not just to commodities traders

"Investors Flee Commodities" , Wall Street Journal Online

Just to give you an idea of scale ..... the Commodity Research Bureau (CRB) Index of 19 different commodities has fallen 25% in 12 months, and 57% from the (fairly) recent highs of 2011.

Naturally enough, amongst commodities Gold and Oil are the headline grabbers. We spoke about the yellow metal yesterday (today's financial media is full of it!), but it's worth adding that the attraction it once held as a hedge against inflation at a time when central banks were embarking on huge Quantitative Easing programmes (not entirely accurately seen as "printing" money) is a busted flush. Inflation numbers have stubbornly remained low, or even negative. As for oil and what's causing renewed downward pressure ..... well, let's just say that after Iran's nuclear deal was struck and the way cleared for the lifting of sanctions, the prospect of that nation pumping up to 4m barrels a day is weighing heavily on the market. (A note of caution here, though ..... much of Iran's infrastructure has been mothballed for some time and there's no guarantee that they will be able to hit production targets as soon as they hope to).

With apologies for the repetition, we have to remember that most commodities are quoted in US$, and a strong dollar (effectively close to 12yr highs) naturally pushes the prices of those commodities lower. With a US rate rise in the pipeline, the prospect of continued dollar strength and higher yields in US assets hardly boosts the attraction of commodities as an investment vehicle.

And supply and demand, always the fundamental equation behind any price and most obviously so in commodities ? The sharp drop-off in Chinese demand for base metals, iron ore etc has had devastating effects on prices, with falls in some cases of well over 50%. Even the agriculturals are not immune  --  yesterday sugar fell 4.4% to its lowest price for 6 1/2 years. So what ? In consumer nations, we can be sanguine, even happy, about falling prices. But that would be short-sighted. The effect on producer nations, with tumbling export revenue hitting growth and employment, and subsequent stimulus-driven rate cuts hurting already weak currencies, is plain to see. Just look at the performance in 2015 alone of the currencies of commodity producing nations :

Aus $  , down 9.8%

NZ  $  , down 16%

Can $  , down 11%

Braz Real , down 17 %

And just imagine what a continuing downward spiral in the oil price would do to places like Nigeria and Venezuela. This is a global economy, but for both economic and geopolitical reasons the bail-out of commodities could presage bigger problems ahead.