Kristian Rouz — Global prices for raw materials have been retreating for 15 consecutive months, giving international investors increasing concern for a possible commodity crisis, similar in fashion to a classic textbook overproduction glut. Amidst the shrinking international demand for manufactured goods and the resulting factory gate deflation in mainland China, the consumption side of commodity markets is faltering elsewhere, with major losses in energy, metals and mining industries. Even though the US Federal Reserve took their time over maintaining ultra-low borrowing costs, there are hardly any upside factors supporting prices on raw materials: the recent wave of devaluations across emerging markets has undermined any hint of a recovery anytime soon.
Now, in recent days copper prices have crashed below their 200-month rolling average: the metal is trading 2% below that, at a six-and-a-half-year low. The 8.8% slump in Chinese manufacturing profitability in August, reported yesterday, was the main drag across all commodity markets. December delivery contracts traded as low as $2.26/lb, compared to copper's mid-2010 highs of $4.50/lb.
The demise of Glencore, one of the world's biggest miners and commodity traders, also played a significant part in depressing commodity prices. Several other commodity companies suffered a blow to their market valuation, including the Asian raw materials trader Noble, down 11% to its 2008 level.
The Japan-based shipping company Daiichi Chuo Kisen Kaisha filed for bankruptcy on Tuesday. The company is unable to meet its creditors' financial demands as the decline in commodity prices undermined the profitability of their entire business.
Another disturbing example is the global trading enterprise Louis Dreyfus Commodities B.V., based in the Netherlands, having reported a massive decline in profits in the first half of the year.
Consequently, prices continue their retreat. Bloomberg's index of raw material prices including oil, gold and soybeans has slumped 50% since 2011 and is just below 90, after hitting a high of 175 in July 2011. Commodity prices seemed to start their rebound in the summer of 2014, however, the subsequent crash in crude prices and widespread political risks quashed any optimism.
The market situation is more of a confidence crisis: investors and traders believe that Beijing is able to fix their economy soon, and that the US Fed is seriously intending to hike borrowing costs. Whilst the US economy is expanding robustly, it is insufficient to support the entire global commodity market: the US is hardly a major raw materials importer. China is, however, meaning a recovery there is a necessary condition for a rebound in commodities.
In the US, meanwhile, the commodities sector is undergoing an ambitious transformation, which is best described as de-monopolization in an attempt of many major companies to lower their exposure to prices fluctuations. Alcoa, Inc., America's largest aluminium producer, announced it would split into two separate companies as the overproduction affects its current cost-efficiency.
The commodity markets situation is only a consequence of the global slowdown in manufacturing and the overall overproduction crisis. In the past 10 years, mainland China's massive increase in industrial output allowed for a rapid development and expansion of commodity production in Australia and New Zealand, many nations of Africa and the Middle East. Global growth has become more mediocre by this point, and while Beijing is reforming and adjusting its economy to the new reality, vast commodity production capacities in many nations lay idle, plagued by a lack of effective demand and the underinvestment.
This is not yet a crisis, but things might deteriorate unless commodity producers manage to optimize their performance strategies.