Further Commodity Price Declines Imminent

05/10/2015 17:08

"Prepare for further big declines in commodity prices", writes A. Gary Shilling, as a process of American and European deleveraging is far from finished and expectations of continued Chinese expansion led to massive overcommitment to supply. In short, slowing growth has lead to a general surplus of supply relative to demand, forcing the prices of overabundant commodities down. Shilling cites additional forces depressing prices, such as "a number of hard-rock miners being so deep into new projects that they are compelled to complete them. Closing down the ventures would be more expensive than the losses they’d incur from selling production at today’s prices."

He writes that some commodities, especially aluminum, are produced in developed countries like the US and Canada. Once demand falls and profits nosedive, owners shut down smelters. The drop in supply offsets some of the downward pressure on prices. But copper is mostly mined in developing nations like Peru, Zambia and Chile.  They need the revenue from copper exports to service their hard-currency debts. So the lower the copper price, the more physical copper they must produce and export to earn the same dollars. And the more they export, the lower the price, in a self-feeding downward spiral. A similar scenario applies to sugar. Producing countries everywhere are in a bind that will not see relief anytime soon.