Commodities slump sends slow ripples through world economy

LONDON: 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.

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.


The lurches in gold, including the sharpest one-day drop in 30 years on Monday, have grabbed the attention, but falling oil prices are of much greater economic significance.

Brent crude is down about 16 percent from the year's high at $119.17, hit on February 8.

Economists at JP Morgan estimate a 15 percent 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 percent decline is consistent with a 0.5 percent downgrade in global growth prospects for the year, the bank calculates.

"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.


Pinpointing the repercussions of the commodity sell off is further complicated because it cannot be seen in isolation.

But executive director Panja Senadisai said the savings are outweighed by the strength of the Thai baht against the dollar, which hurts KCE's exports.

Still, JAL has already responded by announcing a 7.6 percent cut in cargo fuel surcharges from May 1 to 122 yen per kilogram on long-haul international routes.


Cheaper food is a particular boon in countries with uncomfortably high inflation. Take Indonesia, where inflation scaled a nearly two-year high of 5.9 percent in March.

Thanks to falling prices for everything from rice to meat and shallots, the month-on-month rise in consumer prices will probably be less than 0.1 percent in April, according to deputy central bank governor Perry Warjiyo.

"Our job is to make sure that the customers understand that they actually have a big value proposition by shipping with us... The customers are willing to pay a bit more. This is not a commodity. There's more to it than just shipping a box," said chief executive Nils Anderson.

With global inflation by and large benign, the door is open for leading central banks to provide even more monetary stimulus. St. Louis Fed President James Bullard said he would favor increasing the pace of the Federal Reserve's bond buying if inflation continues to go down.

Falling commodity prices and slower wage growth give the Bank of England more scope to resume bond-buying to try to galvanize the economy, BOE policymaker Martin Weale argued.

Even the conservative European Central Bank has hinted that it is open to doing more. With the bank's economists forecasting an inflation rate of just 1.3 percent in 2014, well short of its target of just under 2 percent, more and more economists expect an interest rate cut next month.

China too has increased policy room. "The drop in global commodity prices is obviously very good news for China, because it will help lessen imported inflationary pressure and leaves Beijing much more scope to expand credit and loosen monetary policy to bolster the domestic economy," said Yuan Gangming, a researcher at the Chinese Academy of Social Sciences.


India, Asia's third-largest economy, is hoping that the commodity rout will not only dampen inflation but also reduce its twin deficits. Crude and gold imports contribute nearly 45 percent of India's total import bill.

"The fall will help us deal with the widening current account deficit, which is the biggest worry for the government," said a senior official at the ministry of finance in New Delhi.

India spent $169 billion on foreign oil in the fiscal year that ended in March, 9 percent more than the year before. That is a big factor behind a full-year current account deficit likely to have been around 5 percent of GDP - a level the central bank governor has called unsustainable..

And because India heavily subsidizes consumer fuels and fertilizer, the government's budget deficit for the new fiscal year could well come in below its target of 4.8 percent of GDP if global commodity prices keep declining, the official added. The fall in crude prices could halve the oil subsidy bill.

Australia would appear to be an obvious loser from an end to the commodities super-cycle. The 'Lucky Country' has enjoyed more than 20 years of unbroken growth, largely thanks to booming exports of minerals and energy to Asia.

Lower commodity prices and a strong Australian dollar have already forced Treasurer Wayne Swan to slash his forecast for tax revenues, especially from company earnings and a new profits tax on big iron ore and copper mines.

As a result the government has had to abandon its promise to return to a budget surplus for the year ending in June. But Swan remains optimistic about growth prospects across Asia.

"The growth in the middle classes across the Asian region will produce demand for a whole range of goods and services, not just in resources, not just in agriculture, but across a wide range of activities and I think the consequence of that will only be good for Australia," he said. - Reuters

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