JOHANNESBURG (South Africa) – Renowned oil expert Daniel Yergin recently observed that the collapse of crude oil prices is just the last act of the commodities ongoing tragedy. Commodity prices exploded in recent years mostly because of historically unprecedented demand from China. But China’s boom is over. And commodity prices are essentially in a free fall, due to lack of demand.
The consequences of this collapse
Yergin noted that this collapse is bound do have serious economic and political consequences in countries such as Brazil that for a long moment believed that they had become really rich by selling to China. Now the leaders, and the mining conglomerates that operate in their countries, know that it was only a dream. Except that many of them (very unwisely) borrowed a lot during the go-go years, using that dream as collateral.
How bad is it?
Well, how bad is it? Bad enough. According to a BBC report, copper dropped another 2% in recent days. It is now “at its lowest level in six and a half years”.
Indeed, copper is now at $ 4,995 a ton. We are back to the depressed levels copper reached in 2009, when the world was right in the middle of the Great Recession. And here is the rest of the BBC report:
“Demand for copper, which is used across industry from construction to car manufacturing, has suffered from the slowing Chinese economy.
Investment bank Goldman Sachs warned investors this week that prices would continue to fall. In a note entitled, “Copper’s bear cycle still has years to run”, its analysts predicted copper prices would probably drop to $4,800 a tonne by the end of December and to $4,500 by the end of next year. The decline in copper is only a part of a global meltdown in commodity prices caused by China’s economic downturn.
Crude oil has fallen some 60% from June last year, thermal coal has been on a long 60% slide since 2011, and iron ore is down even more, close to 70% since 2010.
The effects are rippling out into other sectors. On Tuesday, Japanese shipping business Daiichi Chuo Kisen Kaisha filed for protection from creditors, caused by the collapse in Chinese demand for iron ore and coal.
Unsurprisingly the collapse sent a shiver through the rest of the Japanese shipping sector. Nippon Yusen, Mitsui OSK Lines, Kawasaki Kisen Kaisha saw their shares fall between 4% and 8%.
And the effects spread far wider than the mining companies and their support services. Any economy dependent on commodity exports is seeing its currency punished. Australia, whose iron ore, coal, oil and natural gas fueled the Chinese boom, has seen its dollar lose more than a quarter of its value against the US dollar over the past year. [Bold added]
Chile, where copper makes up 30% of the value of its exports, is expected to announce on Tuesday that public spending, having grown almost 10% last year, will rise by half that amount this year. Economic growth there has slowed along with the fall in the copper price and a decline in investment in the mining sector.”
China’s binge
So, here is the thing. China engaged in the construction equivalent of a historic drinking binge. Its leader really thought that they could counter the 2008 Recession through gigantic debt-driven investments in “everything”: shopping malls, luxury condos, high-speed rail, ports and airports. In pursuing this construction extravaganza, the Chinese generated an unprecedented wave of commodities imports.
But now the enormous debt created to finance all of this construction is catching up with China. The boom is over. And the commodities sellers now know tow things. Number one, going forward China’s buying will be modest –at best. Number two, they will have to deal with the massive debt that they contracted in order to finance the growth of their sectors, so that they could meet China’s appetites.
Massive malinvestment
Well, China’s growth was driven by malinvestment. Sadly, it turned out that malinvestment was contagious. Everybody invested in additional capacity hoping that China’s absurd levels of demand for iron ore, copper and what not would continue essentially for ever.
South Africa will suffer, along with Australia, Brazil, Chile, Zambia, and many other commodities exporters. Add to this troubling picture the well publicized afflictions of all oil exporting countries, and then you cannot be surprised when reading that the IMF just revised down its global economic growth projections.
Still, please note that, if there are going to be negative economic repercussions in Germany because of the global slow down, in Brazil and elsewhere it is going to be a lot worse. Brazil and most of the other commodities exporters do not have a “Plan B”.