Commodity prices have fallen in recent weeks, led by oil, iron ore and copper. Market observers are getting nervous. Just as last year’s commodity price rally signalled improving global economic conditions, could the sell-off portend a downturn? It is, of course, too soon to tell. Importantly, though, there are good reasons on the supply side to believe that the price falls are not signalling a sharp fall in demand. For oil, the main story is that higher prices are bringing US shale producers back to life and that there could be global oversupply, not weak demand. Iron ore supply is also ramping up and, so much so, that the decline in iron ore prices had been widely anticipated. Finally, the ending of strikes at the world’s largest copper mine in Chile is set to boost copper supply, so, again, it is not necessarily a demand story. To the extent that the price fall does reflect weaker demand, it is almost certainly a China story, given that China dominates metals consumption. But this would not be surprising. Indeed, HSBC’s China economists are already forecasting that China’s growth peaked in Q1 at 6.9% and will ease through the year to 6.6% by Q4. At these rates, China’s growth is still pretty hefty.
The world does not need to worry much at this point, Bloxo. But Australia does. This slowdown is headed directly and peculiarly for us.
Thus, Bloxo, you also need to worry about your rate hike call.
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal.
He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.
