Commodity prices falling due to weak demand, not just strong dollar
Moneylife Digital Team 22 May 2013

The conventional wisdom is that commodity prices go down when the dollar rises. But the recent weakness in commodities is not just due to a higher dollar, says Credit Suisse. Weak economic data coupled with slack in demand are the major reasons

Commodity prices all over the world have dipped, while some like copper and gold have crashed. A lot of investors have blamed it on a strong US dollar. However, Credit Suisse thinks otherwise. It feels that the global economy, particularly the US economy, is still weak. “It is notable that the broad US dollar trade-weighted index has not moved above its recent range, with our foreign exchange strategists suggesting that talk of a US dollar bull market is premature.” In other words, the strong US dollar is only a temporary phenomenon and the US economy is expected to slow down and this being reflected in lower commodity prices.

Credit Suisse expects the global economy, especially the United States GDP, to contract to 1.5% SAAR (seasonally adjusted annual rate) in the 2nd quarter of 2013. The report said, “It should be noted, however, that in part the rebound was payback for the very weak Q4, with our economists expecting growth to have slowed to 1.5% in Q2.”

Much of the demand in commodities over the past decade has been largely fuelled by insatiable Chinese demand and its real estate growth. But this is expected to slow down. Apart from the stronger US dollar, the Chinese economy has also played a part in the fall in commodity prices as demand was weaker vis-a-vis lower GDP, at 6.6% SAAR. Credit Suisse expects the Chinese economy to slow down and stabilise. It said, “Looking ahead however, our long-held view that growth in H2 will slow a little continues to play out, with early signs that the surge in infrastructure spending may be peaking out, while the growth in each of housing sales, starts and completions looks to have peaked.

Iron ore prices continued to fall. Credit Suisse feels that China’s house prices have peaked out while industrial production has slowed down. Therefore, the excess production that is unmet by demand needs to be rid off, albeit at lower prices. The graph below shows how corporations and traders are stuck with high inventories piled up in the preceding years and are trying to get rid of it.

Credit Suisse expects the iron ore market to be smaller by 75 metric tonnes in the fourth quarter, compared to the first quarter.

Copper is showing downward trend as well, when recently it touched record inventories on the London Metals Exchange. The report said, “Inventories at downstream processors rose fractionally to about 5.4 days’ demand in April, reflecting buying support as prices came off. Nevertheless, further restocking is unlikely, with few operators willing to purchase large parcels at a time when concerns about seasonally slowing orders are beginning to mount”

Generally speaking, commodities world over continue their downtrend as demand slows down and, more importantly, supply and inventories reach record levels. According to Credit Suisse, the table below shows the performance of different commodities.

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