Commodities – tomorrow’s problem?

Commodities – tomorrow’s problem?

The supply of primary products continues to significantly exceed demand, driving commodity prices into the ground.

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The supply of primary products continues to significantly exceed demand, driving commodity prices into the ground.

Background

Primary products are any materials that are extracted straight from the earth and then traded in a raw &/or unprocessed state. These primary products are traded worldwide in commodity markets, approximately 50 major commodity markets are traded each day, these include soft commodities such as cocoa, palm oil, wheat, soybeans and sugar as well as hard commodities such as oil, gas and precious metals.

Primary product production is hugely varied across the world, with products as likely to come from large multinational companies as they are from small scale producers.

The top commodities traded across the world are energy related products, precious & industrial metals and agricultural crops.

Decline in commodity prices

The overall decline in commodity prices recorded at the end of 2015 was 1.3%, however the projection for 2016 is currently even worse, in fact the World Bank has lowered its forecast for 37 of the 46 commodity prices. Non-energy prices are forecast to drop by 3.7%, with metal prices projected to fall by another 10% in 2016, after a 21% fall in 2015. Agriculture is also expected to see a reduction, currently forecast to drop by 1.4%.
One of the major reasons for this decline is the fact that the world is currently “drowning in oversupply” of many of the key commodities.

Huge growth of the commodity markets has been seen in the past as a result of the emergence of some major new economies such as Africa, Russia, India, China and Brazil. Over the years however the growth of these new economies have slowed, a major factor in the decline of the worldwide commodity prices which have in fact dropped by 40 percent since 2010.

The major economic slowdown in China is acknowledged as one of the major reasons for the continuing drop in commodity prices, threatening both economic and political stability in a number of the developing economies across Africa, as well as Asia, Latin America and the Middle East.
commodities

Africa is feeling the pain

A number of countries are hugely, and in some cases overly dependent on commodities and as a result their economies are at serious risk when there is a drop in commodity prices. Nigeria and South Africa, two countries previously seen as “commodity-producing powerhouses” are at present suffering major economic slowdowns as a result of the current situation.

Palm oil is a multi-billion-dollar industry, being used in millions of products by almost all major food manufacturers. It has however been highlighted by the World Bank as a particular concern, with them predicting the price to drop to $557 per ton, down from $589 in 2015 and $808 in 2013.
Ivory Coast is home to Africa’s largest palm oil refinery and as a result palm oil production is hugely important, supporting a workforce of over 2 million people. A major drop in price could therefore be very serious for the country.

Low oil prices hit wealthy countries

Russia’s economy is also suffering as a result of the drop in the price of primary products, particularly oil which fell 47% in 2015. Budget deficits are even occurring in some very wealthy countries in the Middle East due to the current price of oil. In January 2016 the World Bank actually lowered its forecast for crude oil again to $37 per barrel, from an already low forecast of $51 per barrel that they made in October 2015.
Ayhan Kose, Director of the World Bank’s Development Prospects group said “Low commodity prices are a double-edged sword, where consumers in importing countries stand to benefit while producers in net exporting countries suffer”, “It takes time for the benefits of lower commodity prices to be transformed into stronger economic growth among importers, but commodity exporters are feeling the pain right away.”

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