As commodity markets trend lower, does it raise concerns of ‎global economy?‎

Observers warned of the decline in commodity prices, considering that it highlights the global economic collapse and the risks of recession.

Slowing economy

Market observers told CNBC that commodity prices such as crude oil and iron ore have declined this year, confirming the continued economic downturn around the world and potential recession risks.

Global commodities have declined by more than 25% over the past 12 months as evidenced by the Standard & Poor’s GSCI index which tracks the performance of twenty-four primary commodities – a benchmark that measures the performance of the broader commodity markets.

Among the various baskets of commodities, industrial metals fell by 3.79% during that period (through June 30), while energy commodities such as oil and gas fell by 23%. Conversely, agricultural commodities such as grains, wheat and sugar rose by almost 11%.

But the overall decline in the index likely indicates a global economic slowdown and recession, analysts say, as China’s COVID-19 recovery loses momentum.

“Iron ore and copper are very good gauges of the global economy, including construction and manufacturing, which are in recession in several parts of the world,” Reid Anson, senior commodities analyst at Kpler, said via email. ,

“I think that will be evidenced by a broader decline in economic activity, particularly in the West,” Anson added. He expects the United States to most likely see a contraction in GDP in the last quarter of this year or the first quarter of 2024, and that Europe will follow suit in three to six months.

China stumbled:

Anson argues that the failure of the Chinese economy to live up to market expectations is the biggest reason why commodity markets are struggling to find a floor. China published economic data that was weaker than market expectations, indicating a faltering Covid reopening after years of strict lockdown. Bank of America analysts confirm that China’s recovery was weaker than expected

Real estate market stagnation:

Particularly for real estate, investment was down 7% year-on-year, said Mate Zhao, head of core materials, Asia Pacific and oil and gas research at the bank. The decline in the real estate market is often associated with a decline in the demand for building materials such as steel, aluminium, copper and nickel. The stagnation of China’s real estate sector is expected to drag on for years, according to Wall Street banks. Anson said the Chinese government did not appear likely to pursue a strong fiscal stimulus package. Even if this is the case, “it must be significant to convince the markets at this stage.

Oil dip:

While prices of soft commodities, referring to agricultural products, are rising as El Niño affects crop production prospects, energy and industrial metals are traded much less. Analysts agree that among the biggest losers in the decline in commodities are iron ore and oil. Kpler cited the pessimistic outlook for copper as well, which serves as a measure of the economic pulse given its various uses such as electrical equipment and industrial machinery.

Oil prices have slumped dramatically, with global benchmark Brent crude down 34.76% year-on-year, even as OPEC production cuts take effect. Zhao said weak energy consumption in Europe, due in part to warm winters, has pushed gas storage to the highest levels in the past five years in the EU and pushed down prices. In addition, China, the world’s largest oil importer, is increasing coal production instead amid an energy crisis.

Zhao expects energy prices to recover in the event of a cold weather in the second half of the year.

According to Bank of America, average year-to-date steel and iron ore prices are down 16% year over year on the back of slowing construction demand. Weak construction demand is also reflected in other building materials such as cement, whose stock levels have reached 75%. Iron ore is mainly used in the manufacture of steel, and it is an important material in construction and engineering projects.

Low demand:

For his part, the director of commodities and real estate assets at S&P said that commodities such as industrial metals tend to move lower before leading economic indicators such as purchasing managers’ indices, and they have historically helped signal the possibility of a decline,” noting that oil tends to “ The decline sharply” with a decline ..

“In general, many major commodities have declined over the past few months as businesses and consumers cut their demand ahead of a potential economic downturn,” he said.

Wederhold noted that commodities also tend to move in tandem with changes in inflation. He said that if inflation continues to decline, commodity markets may see a further downturn in the short term

According to the International Monetary Fund, global headline inflation is expected to decline from 8.7% in 2022 to 7% in 2023. “As commodities are an early indicator, I would say prices will likely struggle to find a floor,” Anson said.