Now here’s the real story for commodity exporting countries such as Australia – it’s not just falling iron ore prices that threaten to wreak havoc on the trade accounts and export income, the prices of many other products, from wheat, to sugar, to milk, to copper and coal are at multi-year lows in many cases and threaten New Zealand, Canada and Brazil as well.
Indexes overseen by groups such as Bloomberg and Goldman Sachs are showing sharp declines in prices which have accelerated in the past few months.
That’s despite a jump in global geopolitical tensions in the Middle East, Ukraine, the South China Sea and Libya.
Gold and oil prices have fallen, rather than rise in the usual pattern these commodities have followed in times of stress and fear.
The fighting in Ukraine, a major grain producer should have triggered, a surge in wheat prices in particular, but apart from the odd spurt, there’s been no lasting rise.
The continuing weakness in gold prices is perhaps the best indication of how the fundamentals for many commodities have weakened. The old verities of tensions up, gold and oil up, have gone for the moment, at least.
On top of these factors, there’s the gathering strength of the US dollar (all commodities are quoted in the US currency) ahead of the Fed ending its huge easing program which is adding to the downward pressure on prices already weakened by tepid demand, huge harvests and stocks.
These obvious concerns are being overwhelmed by the impact of rising global stocks of commodities from iron ore to sugar, coal, dairy products, grains and oil seeds, are helping drive prices lower, helped by slowing demand from China.
Iron ore prices have fallen more than 10% since the start of August and 40% from the start of the year, thanks to slowing demand from China, but mostly due to the growing production from the four majors, BHP, Rio Tino, Fortescue and Vale of Brazil.
Overnight Thursday the price of iron ore for immediate delivery to China fell 0.4% per cent to $US81.90 a tonne, a new four year low. It was the eighth daily fall since the beginning of September.
Bloomberg reports that its own price index fell to a five-year low overnight Thursday.
Brent type crude oil fell to its lowest level since 2012, wheat, corn and soybeans dropped to new four-year lows after the latest data on the current, huge US harvests, and gold dropped to a new seven-month low.
Economists say the combination of high stocks, record harvests and weak economic growth in Japan, Europe and now China is adding to the pressures from the continuing surge in US oil production.
China’s economy is definitely slowing – it’s not as bad as what’s happening in Europe where the euro-area recovery stalled in the second quarter, but China for commodity producing countries and companies, it’s a major change in outlook.
China’s weaker demand has taken the upward price pressures from many commodities, aided by rising production and oversupply.
The Japanese economy contracted by the most in more than five years, thanks to the April 1 tax rise. The expected rebound is looking weak, based on early data.
Compared to China, Japan is no longer a major influence on global commodity markets, thanks to years of weak demand, deflation and a falling and ageing population and workforce.
The UN’s Food & Agriculture Organisation (FAO) said overnight that food prices fell to their lowest level in almost four years as the prices of milk, grains which as wheat, corn and soybeans and cooking oils continue to fall.
For hundreds of millions of poor people, this is good news, but for the producers in Australia, Brazil, the US and New Zealand, it’s an unwanted and growing headache.
The FAO’s index of 55 food items dropped 3.6% to 196.6 points, the lowest since September 2010.
The agency’s gauge of dairy prices slumped 11% and the vegetable-oil price index declined 8% to the lowest since November 2009 (thanks to weak palm oil prices).
The prices of cotton, soybeans, corn and wheat have fallen into bear markets this year as farmers in the US prepares to receive record harvests.
The prices of sugar has also plunged to four year lows, but not so meat prices such as pork and beef which have risen in recent months (led by rising prices in the US and Australia).
Dairy products have been especially weak (as we are seeing in NZ and in the local export market in Australia). “Quotations for all dairy products covered in the index fell,” the FAO wrote. “The decline reflected both abundant export availability and reduced import demand.” The FAO’s dairy index declined to 200.8 points from 226.1 points.
Sanctions involving Russia, a major importer, is helping push prices lower, as well as oversupply in NZ, the US and Europe.
The International Energy Agency overnight Thursday trimmed its forecast for the rise in oil demand this year for the third month in a row, calling the recent slowdown in demand “nothing short of remarkable.”
In its closely watched monthly oil market report, the IEA said it expects global oil demand to grow by 900,000 barrels a day this year, down 65,000 barrels a day compared with last month’s forecast and down by 300,000 barrels a day since July.
According to the Agency, oil demand growth in the second quarter was at its lowest in more than two years, thanks to weaker demand in Europe and China, a trend that’s expected to continue lower demand.
“While demand growth is still expected to gain momentum, the expected pace of recovery is now looking somewhat more subdued,” the IEA said.
The agency expects 2015 oil demand to rise by 1.2 million barrels a day next year, 100,000 barrels a day less than it forecast last month.
Oil, with its combination of weakening demand, oversupply and the stronger US dollar, is a metaphor for the wider commodity markets.
Iron ore might grab the headlines in Australia, but its weakness is not alone, a point investors should be aware of.
