Slumping commodity prices a correction but not a ‘crash’
When looking at commodity prices, investors tend to have short memories.
Words like “crash” and “collapse” have been thrown around with frequency in recent days and weeks. The panic appeared to hit a high point on Monday morning, when commodities fell sharply in the early hours before rebounding through the afternoon.
But experts noted that the current market action does not rate as anything close to a “collapse.” To see what that looks like, one only has to look back six years.
After the global financial crisis unfurled in the fall of 2008, oil prices plunged below $35 US a barrel, copper dropped to about $1.20 US a pound, and gold bottomed out at close to $700 US an ounce. Many of the world’s top producers struggled to make much (if any) money at those prices.
By comparison, the latest commodity volatility barely qualifies as a blip. $66 US oil, $2.90 US copper and $1,150 US gold are prices that those industries can easily live with. Even iron ore, which has plummeted by almost half in 2014, is priced at a level that guarantees massive profits for the world’s three major producers.
Of course, it is possible that com- modity markets could get much worse — last week, oilpatch financier Murray Edwards predicted crude prices could drop to $30 US. But most people still consider that a huge long-shot.
“When people talk about $40 US crude, I think they’re getting a little carried away,” said Patricia Mohr, commodity market specialist at Scotiabank. “We are not in the midst of a terrifying global recession like we were in 2008. It’s just lacklustre, modest global economic activity with some soft spots, being Japan and the eurozone.”
She also pointed out that this has been a pattern in recent years. The year begins with high hopes of a rebound in global growth. When those numbers are revised downward in the fall, financial markets drop.
An additional factor working against certain commodities today (notably oil and iron ore) is excess supply. That was much less of an issue in prior corrections. But lower prices will bring lower capital spending across the sector, experts noted, which should whittle away that surplus over time, even if global demand remains relatively slow. It will also force out highercost producers.
This latest commodity correction has been painful, but it is hardly unprecedented. Last week, Palos Management Inc. noted that since 2005, oil has had eight cor- rections of more than 20 per cent, and five additional corrections of more than 30 per cent.
Of course, that leaves the question of where commodity markets will bottom out this time. Experts said it is just too soon to tell.
“When commodity prices drop this far, everyone calls a bottom. And then they tend to go lower,” said Jessica Fung, commodities analyst at BMO Capital Markets.
The steep drop in oil prices has dragged down many other commodities in recent days. But over time, Fung sees a “differentiating point” emerging in which certain metals will outperform.
She noted that weak oil prices mean a strong U.S dollar, which would be negative for gold, silver and copper. But low oil prices would mean increased consumer spending power, which could mean stronger demand for automotive products, aerospace products and appliances. That is bullish for metals like nickel, aluminum, palladium and zinc, she said.
Indeed, those metals have quietly performed well in 2014 despite the doom and gloom hovering over the commodity space. The reasons are specific for each one; for example, nickel has benefited from an export ban on unprocessed ore in Indonesia, and in the case of zinc, a number of long-running mines are closing due to depletion.