Impact Of Global Slowdown On Commodity Prices

Posted in Finance Articles, Total Reads: 1709 , Published on 01 September 2012
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The global economy is faced with huge economic challenges. While the Euro zone crisis persists, slowdown in other developed countries, like the US, Britain and Germany, is impacting industrial activities in developing countries, too. This was further affirmed by the global manufacturing purchase managers’ index (PMI) that fell 7.7 points between February and November 2011. Commodity prices corrected sharply, as slow growth depressed demand; S&P GSCI Index contracted by 12% in April-December 2011.


In 2011, the US and Japan were the only developed economies that showed signs of recovery. While the US economy grew 2.5% in 3Q2011, benefitting from the growth in consumer spending (2.4%) and higher international trade, Japan’s industrial production bounced back in 2H2011 on reconstruction work. However, developed European economies contracted or slowed down drastically in 2H2011. Britain’s GDP shrunk 0.2% in 2H2011, while Germany’s GDP contracted by 0.25% in 4Q2011. Recession in other high-income Euro-zone economies (Greece, Italy, Spain and Portugal) is more severe. Consequently, developing countries like China, India and Brazil were impacted by: a) lower exports, due to slower demand from Europe; and reduced investment inflows from the West.

In 3Q2011, China registered its slowest GDP growth since 2009 of 9.1%, as manufacturing activity declined in tandem with a fall in exports (manufacturing PMI declined to 49 in Nov 2011) and the real estate sector slowed down (prices have corrected 30-35% in the last three to four months). India, the world’s second-fastest growing economy, also slowed down, reacting to government’s moves to curb inflation, policy inaction and a decline in foreign investments. The country reported GDP growth for 2Q 2011-12 of 6.9%, down 80bps QoQ and 200bps YoY.

In line with IMF’s revised estimates, it is expected that the US and Japanese economy will grow by 2.2% and 1.9% in 2012, while Europe will spend a good part of 2012 recovering from the ongoing financial crisis. Economic growth in the OECD countries is, thus, expected to slow down to 1.3% in 2012 from 1.4% in 2011. The ongoing Euro zone crisis is likely to keep growth in developing economies subdued in 1H2012. However, developing economies are expected to regain momentum in 2H2012, propelled by interest rate cuts and expansionary fiscal policies. China, India and Russia are expected to grow at 8.4%, 6.5% and 3.5% in 2012. Overall, global economic growth is expected to slow down to 2.5% in 2012 from 2.7% in 2011. This could translate into sluggish demand for commodities in 2012.

The demand for commodities is, however, expected to revive only in 2013, as the global economic scenario improves. The OECD economies and the US economy are expected to expand by 1.9% and 2.4%, respectively, in that year. In developing economies, growth is expected to rebound to ~6% in 2013 from 5.4% in 2012 (China and India with expected GDP growth of 8.3% and 7.7%, respectively, will be the fastest growing economies). Global economic recovery will not only revive consumer spending, but will also restore flow of foreign investment into developing countries, particularly in infrastructure projects.

Overall, as per IMF estimates, world trade volumes, which are indicative of the demand for commodities, will improve and grow at 6.8% in 2013. It is also expected that the long-term demand fundamentals of commodities are strong and growth will be driven by an expansion in domestic demand in China, India and Brazil, as these countries narrow the gap between themselves and the developed world in urbanisation, vehicle penetration and electricity consumption.

Despite the Chinese economy slowing down, zinc prices are expected to increase by 3.3% to ~1,986/ton in 2012; China is the largest consumer of zinc. A rebound in China will likely drive up demand for zinc, thus leading to zinc prices remaining firm and grow marginally to reach USD2,063/ton in 2015 further supported by the shutdown of ageing capacities, which is likely to see demand outrunning supply.

The global demand-supply situation for copper is expected to remain at equilibrium in 2012. Hence, prices will remain flat during the year at USD7,504/MT. However, on expectations of slight excess supply, prices are likely to trend downwards from 2013 and reach USD7,378/MT in 2015.

In line with the expectations of increased demand, global aluminium production is also expected to increase from 41.7Mn MT in 2010 to 62.9Mn MT by 2015, registering a CAGR of 8.6% (production from China increasing at 11.3%), with capacity additions across the globe. Small capacity additions in 2012 are likely in Iran, Iceland and India (0.37 million tons per year), while major capacity additions of 2.58 million tons per year and 2.84 million tons per year are expected in 2013 and 2014, respectively. However, the increase in production is likely to fall short of the increase in demand over our forecast period.

During 2005-07, the massive growth of the Chinese stainless industry led to a decline in nickel inventory levels, as supply failed to match demand. This had led to prices rising to USD51,783/MT in May 2007, before returning to normal levels in 2010-11, as an increase in supply from miners such as Vale and Aneka Tambang coincided with a decline in demand caused by the tough economic environment. Going forward, based on our expectation of an oversupply, nickel prices are expected to continue to face downward pressure, and decline from USD17,992/MT in 2011 to USD17,070/MT in 2012 and to USD16,639 /MT by 2015.

Crude prices are also expected to correct in 2012, as supply side concerns get addressed. Prices are then expected to rise consistently to reach USD94.99/bbl in 2015 on stable demand and slower production growth. Due to disruption in supply (Libya ~1.5million bbl/day) crude prices were up 15% to USD103/bbl during 2011, despite recession. During April to August 2011, inventory levels were high, which led to prices falling ~20% during the period. However, with the recovery in demand, inventory levels started falling, pushing prices up ~16%. With Libya restoring supply, we expect crude prices to moderate to USD86.23/bbl (down 13% from 2011 levels) in 2012. From 2013, prices are expected to trend upwards consistently at 3.3% a year to USD95/bbl in 2015 on stable demand from developing and developed countries.

Coal prices to recover from the current levels of USD98/MT and touch USD114/ton in 2012, due to sustainable and high demand from China and India. Recovery in the global economic environment, particularly China, India and Japan, is likely to keep coal prices strong in the long run. Thus it is expected that the thermal coal prices will grow annually at 4% (3-year CAGR) through 2015 to USD128/ton.

This article has been authored by Amit Agarwal from MNNIT.

Image: FreeDigitalPhotos.net


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