Commodities have hit the skids, with the benchmark CRB index of 19 raw materials down by more than 25% from its July peak. Risk aversion and the US dollar have risen, while it has become increasingly clear that economic weakness is spreading across the world. Global economic bellwether copper has lost almost 30% since it peaked in May; the three-month future is now around $6,600.
Global growth forecasts for next year have fallen to around 3%, from a consensus of 5% a year ago, says Deutsche Bank. The Baltic Dry Index, which measures dry bulk shipping costs and is thus seen as an indicator of global economic health and commodities demand, is down by 70% from its May peak. Shipping consultants Drewry expect growth in container-ship imports from Asia to Europe to fall from 15% in recent years to 4%-5% in 2008; such imports to the US will slide by 2%. The US, the UK and the eurozone are all probably in or set to enter recession, while emerging markets are also slowing. India’s growth has hit a three-year low, and growth in China, which according to Deutsche will represent over 40% of global commodity demand growth for nickel, copper, steel, iron ore and aluminium, is faltering.
Industrial production growth has hit a six-year low; car sales fell by an annual 6% in August; and the slowing property market is denting growth in fixed asset investment, which in total comprises around half of China’s GDP. What’s more, notes Christopher Wood of CLSA, China’s steel and iron ore prices have slid by a respective 21% and 34%. After double-digit growth over the past few years, many analysts are now expecting the economy to expand by just 8% next year – “a big slowdown”, says Nicholas Lardy of the Peterson Institute.
Small wonder, then, that commodity price forecasts are now falling. Jitters over demand destruction portend lower prices for industrial raw materials “well into 2009”, says Deutsche Bank. Standard Chartered expects China’s copper demand growth to weaken to just 7% year-on-year in 2008, compared with 16.5% in 2007. With other major economies slowing and inventories trending up, Stanchart reckons the price for the three-month future is likely to average around $6,500 in the second quarter of next year.
Citigroup has slashed its spot nickel forecast for 2009 to $6 a pound ($13,200 a tonne), noting that the market looks set to remain in surplus until 2011; stockpiles tracked by the London Metal Exchange are at a nine-year high, says Bloomberg.com. Nickel is currently around $17,000. Zinc is in surplus and also has some more downside, reckons Citigroup; its average price for next year is around 5% below the current price.
It’s a similar story with oil. This week saw further evidence of demand destruction in the US, the biggest consumer: average oil products consumption was down 6.6% from last year in the four weeks to September 24, says Bloomberg.com. With demand growth across the world to weaken next year, oil could slide to an average $85 a barrel this autumn and in the first quarter of next year, reckons Deutsche. Raw materials are unlikely to embark on a sustained recovery until the next synchronised global expansion begins, says David Fuller on Fullermoney.com. Only then will the commodities supercycle resume.