The still weakening economic picture in China is placing a bleaker outlook for commodities. Major commodity export countries, particularly connected to iron ore and coal, are likely to face a sharp fall in demand.
China has long been a global engine for world economic growth both in terms of commodity demand as well as exports which fell by nearly three per cent in December. Chinese imports slumped by 21.3 per cent in the year to December with domestic economic falling fast. However, the slumping world economy is increasingly impacting Chinese economic growth. The global downturn looks increasingly likely to create a hard landing for the Chinese economy, where growth could well fall below five per cent in 2009.
The hard landing will not only hit world growth but will weaken prices for commodities until light is seen at the end of the tunnel.
Commodity prices have collapsed in a blow out, which has been rapid and substantial. Spot market prices for many commodities are back to the level of five to six years ago, with current weakness abolishing all of the gains. Steel prices have collapsed in correlation with the worldwide downturn in construction. Iron ore and coal looks likely to fall in price significantly over the first half of 2009.
The downturn in commodity prices, together with tight credit conditions, will place significant pressure on small and medium size commodity and resource companies. If prices remain weak for some time, then many small producers will either collapse or be merged. In the recent past with higher commodity prices, there were buyers queuing up but the M&A market has virtually disappeared.
It is not only China that is affecting commodity markets. The large Japanese market is also hitting prices for metals.
Japanese customers are deferring signing new supply contracts for metals such as nickel. Many Japanese plants have nickel stockpiles that will last for some months due to cuts in steel output resulting from weak demand from the motor vehicle, shipbuilding and housing sectors.
The price of oil remains weak. Crude futures prices have fallen by 25 per cent, or $12.30 a barrel from the January 5 settlement of $48.81 a barrel. Negative factors for oil include the deeper global economic downturn and inventory builds.
The International Energy Agency cut its expectations of world oil demand growth this year by one million barrels a day from its month-earlier forecast. Demand is expected to fall 500,000 barrels a day from the 2008 level. Demand last year dropped 300,000 barrels a day, the first decline since 1983.
The global economic crisis is expected to slow oil-demand growth in China, the second-biggest oil consumer behind the US. Oil-demand growth is expected to be just 1.1 per cent, or 320,000 barrels a day, the weakest level in eight years and a fall from 4.2 per cent growth last year.
The flow of international economic news continues to be poor, leaving commodity prices under pressure. US retail sales fell 2.7 per cent in December against expectations of a 1.2 per cent fall. Euro zone industrial production has also fallen sharply.
London Metal Exchange inventories have increased recently for all of the base metals, reflecting the fall in demand. It looks like a hard landing for both the Chinese economy and global commodity prices.
Follow Emirates 24|7 on Google News.