Behind the Commodities Bust
Thursday, August 27, 2015 at 11:51AM
Bill Barclay

Forgive me for again resorting to the Washington Post, but another article today really nails the the issues that lie behind the commodities bust that our politicians and many in the marketplace seem to think is simply a blip in the market. 

This article by Robert Samuelson - an eminent economics columnist who by the way is not related in any way to the Paul Samuelson who published what is probably the most influential textbook 'Economics', that was the standard basic text in every university (including mine!) from the fifties through the nineties and that was primarily responsible for the predominance of Keynesian theory at every level of government up until the advent of the Chicago School of Neo-Libs. I only mention this because of the frequency with which the two are confused -at least in the US.

In this article, Robert S. proposes a range of reasons that lie behind the current commodities crisis, and suggests a rather dismal (it is economics, after all!) prognosis for every country that has allowed the enthusiasm of those who have read far too much into the sustainability of the Chinese expansion to dominate investment policy. 

"Here are declines for five commodities from 2012 through July 2015: oil, down 48 percent; iron ore, 60 percent; copper, 31 percent; palm oil, 39 percent; and wheat, 37 percent. Many commodity prices have continued to fall.

The bubble formed on hopes that China’s rapid growth would feed an ever-expanding appetite for raw materials, says economist John Mothersole of the consulting firm IHS Global Insight. Demand and prices would remain high indefinitely. Although prices fell after the 2008-09 financial crisis, China’s huge “stimulus” package — intended to offset the crisis’s drag — sent them up again, says Mothersole. China’s demand seemed destined to stay strong, as economic growth would stabilize at a high level.

It didn’t. In 2010, China’s economy grew 10 percent; the IMF expects 6.8 percent in 2015 and 6.3 percent in 2016. Other economists think growth could be lower. As a result, much of the added production capacity — mines and the like — to supply China isn’t needed. “There’s a new commodities era,” says economist Rabah Arezki, head of the IMF’s commodities research. “Everyone was rushing to invest. Now they have to adjust to a new lower level of demand.”

And don't imagine for one moment that food is somehow exempt from these changes, as some of our primary producers seem to fondly believe - food is as vulnerable as every other commodity, and the fact that this seems to have escaped the supposedly intelligent minds at Fonterra is more a reflection of their optimism than any real understanding of the market.

We are about to enter some very hard times as other commodities catch up with the trend. 

"What’s occurring is a profound shift in the global economy, says economist Hung Tran of the Institute of International Finance. It had been hoped that the rapid growth of emerging-market and developing countries — accounting for about half of global output — would sustain a vibrant world economy. But that hope is fading."

and:

"There are other dangers. The most obvious is that low prices will result in loan defaults or bankruptcies by commodity producers that weaken financial institutions."

Is is as well that our Treasury undertakes regular "stress testing" of the ability of our banking institutions to remain solvent through this process. They may be mainly Australian owned, but they are on their own in this regard. Shutting down mines does not really compare with keeping highly geared dairy farmers afloat as the effects bite. Do not expect another price-kick in the dairy auction any time soon - quite possibly the opposite. 

 

 

 

Article originally appeared on BillBarcBlog (http://billbarclay.co.nz/).
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