The S&P Goldman Sachs Commodity Index reflects that global commodities have fallen by more than 20% compared with the same period last year.
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Commodity prices such as crude oil and iron ore have been sliding this year, market watchers told CNBC, underscoring the ongoing global economic downturn and the risk of a possible recession.
In the past 12 months, global commodities have plummeted by more than 25%, the specific data is as follows: S&P GSCI – A benchmark for measuring the broader performance of various commodity markets.
Among a different basket of commodities, industrial metals have lost 3.79% over the period (through June 30), while energy commodities such as oil and gas have lost 23%. In contrast, prices of agricultural commodities such as grains, wheat and sugar rose about 11%.
But analysts said the overall decline in the index could point to a global economic slowdown and recession as China’s Covid-19 rebound loses steam.
“Iron ore and copper are good barometers for cyclical parts of the global economy, including construction and manufacturing, many of which are in recession,” Reid I’Anson, senior commodities analyst at Kpler, said by email.
“I believe this will lead to a broader decline in economic activity, especially in the West,” Anson added.
He expects that the U.S. could see a contraction in GDP in the fourth quarter of this year or the first quarter of 2024, with Europe following suit within three to six months.
“The failure of China’s economy to meet market expectations is the biggest reason why commodity markets have struggled to gain a foothold,” Anson continued.
A slew of economic data from China came in weaker than market expectations, pointing to a struggle to reopen after years of strict lockdown. Bank of America analysts confirmed that the rebound in China was weaker than expected.
“Real estate investment, in particular, is down 7% year-on-year,” said Matty Zhu, head of Asia-Pacific basic materials and oil and gas research at the bank. Downturns in the housing market are often associated with lower demand for construction materials such as steel, aluminum, copper and nickel.
The downturn in China’s real estate sector is expected to last for years, according to Wall Street banks. Anson said the Chinese government does not appear to be pursuing an aggressive fiscal stimulus plan. Even if it does, “it needs to be large enough to impress the market right now.”
The Biggest Loser and What It Means
Analysts agree that the biggest losers from the commodity slide are iron ore and oil. Kepler also cited a downbeat outlook for copper, which can serve as a proxy for an economic pulse check due to its wide range of uses, such as electrical equipment and industrial machinery.
Despite OPEC’s production cuts taking effect, oil prices fell sharply, with global benchmark Brent crude plummeting 34.76% year-on-year.
Weak energy consumption in Europe, due in part to a warm winter, has led to a surge in EU gas storage to levels not seen in the past five years and depressed prices, Zhao said. In addition, China, the world’s largest oil importer, has been ramping up coal production amid power shortages.
Still, Zhao predicted that energy prices could pick up in the second half of the year if there are extreme cold weather events.
Average steel and iron ore prices are down 16% year-to-date so far this year due to sluggish construction demand, according to Bank of America. The subdued construction demand is also reflected in other construction materials such as cement, whose inventory levels have reached 75%.
Iron ore is primarily used to make steel, an important material for construction and engineering projects.
“Commodities such as industrial metals tend to move lower ahead of leading economic indicators such as PMIs, and historically, these commodities have helped signal that recessions are likely to occur,” said Jim Wiederhold, director of commodities and real assets at S&P Dow Jones Indices. He added that oil tends to “fall sharply” as an economic downturn occurs.
“Overall, many major commodities have fallen over the past few months as businesses and consumers reduced demand ahead of a potential recession,” he said.
Commodities also tend to move with changes in inflation, Wiederhold continued. Commodity markets could see more downside in the near term if inflation continues to move lower, he said.
according to International Monetary FundHeadline global inflation is expected to fall from 8.7% in 2022 to 7% in 2023.
“Given that commodities are an early indicator, I think prices may struggle to find sufficient footing until next year,” Anson said.