Selling spree: Commodities slump sends slow ripples through world economy

Lower airfares,cheaper food and rising profit margins are among the benefits that should flow from tumbling oil and commodity prices but only after a long lead time.

Written by Reuters | London | Published: April 23, 2013 12:56:02 am

Lower airfares,cheaper food and rising profit margins are among the benefits that should flow from tumbling oil and commodity prices — but only after a long lead time.

Having poured $400 billion into commodities over the past decade,many investors are now selling. Their confidence that risky assets could only float higher on a rising tide of cheap central bank money has crumbled as the global economy fails to respond to the stimulus.

Even China,an important buyer of natural resources,is slowing. Inflation,against which gold in particular is a classic hedge,is falling nearly everywhere.

Price pressures will ease further if natural resources keep falling. That is bad news for exporters such as Saudi Arabia and Brazil but good news for net importers.

Weaker commodity prices should be positive for the world economy on average because falling inflation supports consumer spending,said ABN AMRO economist Han de Jong. Standard and Poor’s Goldman Sachs Commodity Index has fallen 6.6 per cent so far this year.

But raw materials represent a small part of most firms’ costs,so it is not surprising that some businesses,especially those in very competitive markets,are not getting carried away.

“There are thousands of components in a car so the impact might not be that great,” said Cui Liyan with Great Wall Motor Co Ltd,China’s top maker of SUVs and pick-up trucks. “Great Wall has never passed on additional costs to consumers when commodity prices have surged in the past.”

For a US economy experiencing slow growth,cheaper energy is a positive,said Michael Ward,chief executive of CSX Corp,the country’s second-largest railroad. But CSX itself is indifferent because it runs a fuel surcharge program. “Over time,we’re passing the increases or decreases in fuel to the customer,” Ward said.

The lurches in gold,including the sharpest one-day drop in 30 years last Monday,have grabbed the attention,but falling oil prices are of much greater economic significance. Brent crude is down about 16 per cent from the year’s high at $119.17,hit on February 8. Economists at JP Morgan estimate a 15 per cent drop in the price of oil,caused by a supply increase,would be enough to lift global economic output this year by 0.2 percentage points.

But if the price fall reflects a darkening economic outlook,the same 15 per cent decline is consistent with a 0.5 per cent downgrade in global growth prospects for the year,the bank calculates.

An executive at Indian engineering company Larsen & Toubro said the broader fall in commodity prices cut both ways. Cheaper materials would help profit margins and,if the trend were sustained,would increase the chances of lower interest rates,he said. But prices were falling for a reason.

“Prices are down today because the investment cycle has slowed and demand for commodities has slowed. If this extends over the long term,it cannot be a good thing for a projects company such as ours,” he said. India is hoping that the commodity rout will not only dampen inflation but also reduce its twin deficits. Crude and gold imports contribute nearly 45 per cent of India’s import bill. “The fall will help us deal with the widening current account deficit,which is the biggest worry for the government,” said a finance ministry official. India spent $169 billion on foreign oil in the fiscal year that ended in March,9 per cent more than last year.

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