Commodity markets are indicating that global inflation will continue to fall in the coming six months
Prices of cyclical commodities such as copper, iron ore and lumber and agricultural produce, notably wheat, soybeans, corn and rice, have tumbled from their 2021 to 2022 peaks.
Despite their rallies in the past week, oil and gas are well below their 2022 tops.
This indicates that central bank monetary tightening and the jump in US and European interest rates are beginning to work. So much so that the cyclical commodity slump is indicating that several developed and emerging nations are either already in recession or are about to enter a severe downturn.
Examining data of twenty commodities on Chicago, New York and London exchanges, the worst cyclical slides were lumber which slumped by 74 per cent, iron ore by 51 per cent, aluminium and palladium by 45 per cent, cotton by 43 per cent, zinc by 41 per cent and copper by 25 per cent.
The declines came from heady peaks as Covid 19 created shortages and Goldman Sachs and other investment banks promoted commodities as an investment. When the Covid crisis ended, mines and other producers began increasing supplies again. Meanwhile, China, a major buyer, cut demand. The upward price momentum came to a halt and investors and speculators began to bail out, causing further falls. The Ukraine war caused volatility but according to anecdotal reports Russia, despite sanctions, has managed to sell its oil, gas and metals directly to China and some other Asian nations.
The question now is whether recession is already factored into commodity prices. In the past week there has been a minor rally from the 2022 nadir on expectations that China will soon relax its draconian Covid lockdowns. But the Ukraine war drags on and may well continue to disrupt supplies and cause periodic rallies.
Despite the slump from the 2021 to 2022 heights, prices of 20 major cyclical and agricultural commodities are higher than levels at the beginning of 2019, more than a year before Covid and consequent supply disruptions.
“The key period will be the first quarter of next year when the US economy will be in recession,” says Simon Hunt of Simon Hunt Strategic Services, a metals and China consultant. “This is when the Federal Reserve Board may be forced to revert to monetary ease to counter a deep slump.”
“The repercussions will be far reaching,” he adds. “The US dollar will start falling sharply; equities and commodities will begin to recover; oil and gas prices will surge again possibly because of more supply disruptions. Inflation after some correction over the winter will start rising again.”
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The performance of China’s economy will be key. Iron ore prices, for example have slumped to a three-year low because supplies are outstripping demand. China is building fewer new homes and Beijing’s zero-Covid policy has cut demand for steel.The Chinese property market accounts for roughly a third of global demand for iron ore, estimates Jefferies, an investment bank.
The worst performing agricultural commodities this year are palm oil down 45 per cent, wheat minus 36 per cent Arabica coffee down 34 per cent, soy beans, corn and cocoa minus 17 per cent.
An agreement between Russia and Ukraine to continue exporting grain from the Black Sea and has helped Ukrainian exports of agricultural products recover to around pre-war levels, said Greg Heckman, CEO, Bunge, a grain company. That has helped ease pressure on prices.
Still, supply issues persist because Ukraine’s infrastructure has been damaged and crops are poor in other parts of the world, Heckman added.
Executives of US grain companies Cargill and United Grain Corp said that their exports were lower this year because Thailand and the Philippines and other importers are buying less wheat. High prices and the strong US dollar have dented demand. Rice is much more popular, they said.
But next year prices could rise again, contends Carlos Mera, head of “Agri Commodities Markets”, Rabobank, a Dutch bank.
Drought and heat in America has caused soy and corn harvests to shrivel so that inventories in 2023 stockpiles will be at “dangerously low levels”, he says. However, early rainy weather in Brazil’s key agricultural areas has been excellent, bringing promise for coffee and other crops, he adds.
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