COMMODITIES NOW
Commodity Performance in Past Recessions & Possible Scenarios Price at Start of Recession
1980
Platinum ($/oz) Crude oil ($/bbl)
Thermal coal ($/mt) Aluminium ($/mt) Copper ($/mt) Iron ore ($/mt)
1981
- - - - - -
1990
Gold ($/oz) $675.31 $409.28 $362.5 - - - - - -
$479.5 $17.81 $29.50
2001 $263.0 $583.3 $25.45 $33.40
2007 $807.1
Start to Low*
-10.64%
Start to End**
3.82%
$1,496.7 -29.87% -20.32% $91.4 $96.1
-24.37% -14.48% -16.11% -13.52%
$1,600.4 $1,527.6 $2,435.8 -20.89% -16.66% $2,652.5 $1,760.2 $6,679.2 -27.98% -17.41% $39.8
$36.2 $102.6 -0.95% 4.12%
* Indicates price decline from price at start of recession to lowest price during the recession. ** Indicates price decline from price at start of recession to price recorded in the month the recession ended.
Sources: Bloomberg; Standard Bank Research
thin indeed in some key markets such as oil, as well as in several agricultural commodities markets, so there are still very significant supply risks posed by geopolitics and weather events,” according to commodities head Kevin Norrish. Moreover, degrees of supply constraint will be the main differentiators of price performance in commodities going forward .. with crude oil, copper, corn and gold favoured. “So far this year, commodity demand has again surprised to the upside. Reflecting a
Can China emerge as a saviour of
commodity demand in the event of a US/Eurozone recession?
more uncertain economic outlook, markets have recently moved to price in a sharp slowdown in growth. However, we doubt that the strength of early 2011 trends has yet been recognized or understood fully, and we believe that market participants have become too pessimistic about the outlook for commodity demand,” Norrish adds. Nevertheless, many believe that
the probability of a recession in the US and much of Europe over the next six months has risen sharply. Analysts at Standard Bank recently constructed a scenario for commodity price performance based on the price performance during previous recessions; the region where commodities are consumed; the cost-of-production of a specific
8 September 2011
commodity; as well as their current views on the underlying commodities. “It is clear that industrial production drops off sharply during a US-led recession. China is the exception; here, industrial production acts as stabilizer for demand for certain commodities. This is especially the case for metals where China dominates world consumption,” according to commodity strategist Walter de Wet. “This raises the question: can China emerge as a saviour of commodity demand in the event of a US/Eurozone recession? We believe this could partly be the case because the Chinese economy will continue to grow. But we do not believe that China can operate as an economic island. Global macroeconomic weakness will inevitably erode and undermine organic economic activity in the world’s largest exporter of economic health.” During the recent recession, China’s government
took matters into its own hands. This time around, the will of the State to intervene as aggressively is far less apparent. “Therefore, we are seeing (and will continue to see) a more subtle response in
China than during the last recession,” says de Wet. All commodity prices – except gold (normally) – decline during
a recession, with prices declining irrespective of a market surplus or deficit. Even if a commodity market is in a fundamental deficit, inventories can be drawn down. However, a market surplus or deficit at the start of a recession can impact the extent to which a commodity experiences a price decline. Table 1 shows Standard Bank’s analysis: Should we enter a
recession, amongst the commodities they analysed, only gold rises (by 20%). All other commodities are expected to fall, with copper and thermal coal declining the least (by 15% each), followed by iron ore (-25%), platinum (-25%), aluminium (-30%) and Brent crude (-40%).
Regulations Dominate Thinking In the coming weeks and months, the CFTC (and others) will
start unveiling new curbs on the commodity markets as part of a wider bout of financial reform. Tension is high. Economists who insist that fundamentals – such as emerging market demand and inventory levels – are driving prices remain pitted against those who blame financial flows and manipulation.
Possible Price Moves (given recession scenario)
+20% from $1,830 -25% from $1,850 -40% from $105 -15% from $118 -30% from $2,300 -15% from $8,750 -25% from $185
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