Winter is coming. Or, has it already?

Manish K. Pandey | The Dollar Business  

It was September 15, 2008. Financial services behemoth Lehman Brothers, holding over $600 billion in assets, filed for Chapter 11 bankruptcy (the filing remains the largest bankruptcy filing in US history till date). And the financial world came to a standstill. After all, it was the first big casualty of the US housing crisis that abruptly halted a nearly threedecade- long expansion of global financial markets [from 1980 through 2007, the world’s financial assets nearly quadrupled in size relative to global GDP; as per Mckinsey Global Institute]. Not only did the total value of global assets fall by $16 trillion, the deluge also washed away the dreams and hopes of millions of investors around the world. In fact, falling equities accounted for virtually all of the drop in global financial assets, with the world’s equities losing almost 50% of their value in 2008. While the catastrophe was a bane for equity markets, it turned out to be a boon for commodities. Although the crisis resulted in about 50% plunge in commodities prices, they staged a quick and powerful recovery, rising over 115% from the depths of the GFC to a mid-2011 peak that even surpassed the prior-2008 peak. The reason was simple. Commodities were being considered a safe bet once more skeletons started tumbling out of the closets of global financial giants. However, the euphoria didn’t last long. As is the case with every bubble, it had to burst! Come today, and commodity markets, across the globe, have been trending pretty consistently – on a downward movement since second half of 2011. 

A closer look at numbers and you can gauge the seriousness of the situation. The Bloomberg Commodity Index, a benchmark index of 22 exchange-traded futures on physical commodities, is on track for a fifth consecutive annual loss, the longestslide since the data began in 1991. What’s more? The Index is already down about 13.94% year-to-date (October 16, 2015) and 23.55% over the last 12 months. Even the CRB (Commodity Research Bureau) Raw Industrials Spot Price Index is down to its lowest level since November 2009.

While the Brent crude oil prices are retreating to $50-a-barrel levels, copper tumbled to six-and-a-half year low below $5,000 a tonne. Money is rapidly flowing out of every fund linked to industrial metals and energy among others, while stocks of miners and oil majors are being thrashed by investors. In fact, the ‘Great Commodity Meltdown’ has forced 19 oil and gas players across the globe to file for bankruptcy over the last one year, while many are already restructuring their processes. For me, I can’t help but wonder if there would be more to the story than this! Well, that’s another tale worth telling some other day, the bigger question now is: Why are commodities tanking? Is it because of an oversupply? Or, the demand for commodities has gone down? I would say both, as is quite often the case!  The biggest collapse in commodity prices in a generation is a result of a few bigger trends simultaneously going on across the globe! And, not to say, the Dragon gets the biggest share of the blame.

It’s China’s economic slowdown which is playing a major role in slackening the demand for commodities. Raison d’être: China’s consumption of industrial metals had risen from 10% of the world total in 2000 to 50% in 2015 (World Bank data) to feed its manufacturing boom. The economy was growing, and so was the consumption of commodities – to an extent that in a matter of just 10 years China was consuming anywhere between 50% and 80% of global production of most major industrial commodities (70% of metallurgical coal, 50% of thermal coal, 45% of zinc and copper, 48% of aluminum and so on). And then came the tsunami – China slowed down, but production of commodities did not! Chinese growth rates of the last 30 years (till 2012), which averaged 10% a year, are not there anymore. Manufacturing too has slumped to its lowest in six years.

However, producers, across the globe, are still cranking up metals as if there is yet another industrial revolution in the making.

Even other emerging markets like Russia and Brazil are slowingdown. So are developed economies like US and EU. Poor demand is exacerbated by oversupply! And there is a huge glut. Then there is the greenback, which is running ahead of rival currencies like euro and yen. The upward movement of dollar is depressing the demand for oil and other commodities only further by making them more expensive to buy in other currencies. But then, how long will this continue? Well, I would say, the winter has just begun and we are yet to face those chilly winds!  

November 07, 2015 | 3:08pm IST.