China is the largest consumer of commodities, but the COVID-zero policy, cracks in the real estate sector and the disturbing effects of the crackdown on the technology and education sectors have almost brought growth to a halt.
The rise in the value of the US dollar is not helping China, which has seen its currency slide from the seven yuan level to the dollar (it temporarily fell past that level last week) that China has defended in the past in a smidgen.
The Chinese authorities are said to be less concerned about the inflationary effects of a 9% depreciation of the currency against the dollar this year than about the impact on inputs to the vast industrial base, with the currency effects outweighing the benefits of the lower commodity prices.
The rise in real interest rates around the world has also had a different effect. Since the turn of the century, commodities have increasingly become a financial asset class—they have been “financed”—as investment banks, hedge funds and, through exchange-traded funds, other institutions and individuals, have seen them as an alternative to stocks, bonds and property.
The degree of diversification they once offered has diminished and their performance is more closely correlated with other asset classes. They have also become more sensitive to movements in interest rates and the availability of liquidity due to the financing costs associated with holding physical inventories.
As interest rates have risen and central banks have begun to drain liquidity from the financial markets that they had given an overdose of cheap liquidity at the start of the pandemic, financial investors have begun to retreat to the sidelines. As a result, commodity markets have become more illiquid and volatile.
Even the price of gold, once considered the great hedge against inflation, has fallen this year. In March, it was trading around USD 2043 an ounce. It is now priced about 18 percent lower, about $1,680 an ounce.
(Bitcoin, the other major assumed inflation hedge and diversification vehicle, has imploded along with other higher-risk assets. From nearly $70,000 last November, its price has fallen below $20,000. It is currently trading around $19,400 dollars.).
Copper, considered the most sensitive metal to the economic outlook, is down about 28 percent since its March high this year.
Iron ore – the raw material of greatest importance to the Australian economy – was still trading above $150 a tonne in May. It is now under $110 a ton.
The apparent coincidence of some commodities that peaked in March is actually no coincidence. It was in March that the Fed began this cycle of rising interest rates, announcing its plans to shrink its balance sheet (and drain liquidity from the financial markets) from the vast stockpiles of bonds and mortgages it had built up through its quantitative easing programs. to drain.
The Russian invasion of Ukraine in late February may also have had an impact, particularly on commodity price volatility.
It caused energy and agricultural commodity prices to rise and was clearly bad news for Europe’s prospects. Both energy (particularly oil) and agricultural commodities prices have fallen significantly since then – oil is down 29 percent from its March peak – but remain significantly above pre-invasion levels.
It is an open question whether the US will be pushed into recession by the Fed’s efforts to contain an inflation rate that has failed to respond to the rate hikes imposed so far.
It seems inevitable that Europe, ravaged by its energy crisis, exacerbated by a currency nearing record lows, will experience one.
China can avoid a recession, but its growth rate, aside from the initial impact of the pandemic, is as weak as it has been in decades.
Japan will also be held back this year by a more than 20 percent decline in the value of the yen against the dollar.
Under the circumstances, it would have been surprising if commodity prices had held up. If they perform as expected, it won’t be until the end of this interest rate cycle before they, and then (commodities are leading indicators) the global economy, experience a real rebound.
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