A commodities rout is raising economic concerns

A drop in the price of goods worldwide makes people worry about the economy.

Commodities like crude oil and iron ore have been decreasing this year; this shows that the global economy is still in bad shape and that there may be a risk of a recession.

The S&P GSCI Commodities index, which measures how different commodity markets are doing as a whole, shows that the prices of global commodities have dropped by more than 25% in the last year.

From January 1 to June 30, the prices of industrial metals dropped 3.79 per cent, while energy goods like oil and gas decreased 23 per cent. On the other hand, farm goods like grain, wheat, and sugar have increased by about 11%.

Analysts say China's Covid-19 comeback is losing steam, which is a sign that the global economy will likely slow down and go into a recession.

"Iron ore and copper are good indicators of the very cyclical parts of the global economy, like construction and manufacturing, which are in recession in many places," said Kpler's Senior Commodity Analyst Reid I'Anson in an email.

I'Anson also said, "I think this will lead to a wider drop in economic activity, especially in the West."

He thinks that the U.S. GDP will probably shrink in the fourth quarter of this year or the first quarter of 2024 and that Europe will do the same in three to six months.

"The biggest reason commodity markets are having trouble getting their feet is that the Chinese economy hasn't lived up to what the market expected," I'Anson said.

China has been putting out a lot of economic data that is worse than the market expected; this points to a slow restarting of Covid after years of strict lockdowns. Analysts at Bank of America agree that China's growth has been slower than forecast.

The bank's Head of Asia-Pacific Basic Materials and Oil & Gas Research, Matty Zhao, said that investments in real estate fell by 7% from one year to the next. When the housing market goes down, the desire for building materials like steel, aluminium, copper, and nickel also tends to go down.

Wall Street banks say the slump in China's real estate market will last years. I'Anson said it doesn't look like the Chinese government will pursue a robust economic stimulus plan. Even if it does, "it would have to be big to impress the markets right now."

Who lost the most, and what that means

As a result of El Nio, the prices of soft goods are going up, but the costs of energy and industrial metals are going down a lot.

Analysts agree that iron ore and oil are among the worst hit by the drop in commodity prices. Kpler has also talked about how copper's future looks terrible. Copper is used in many things, like electrical equipment and industry machinery so that it can be used as a proxy for the economy.

Even though OPEC is cutting production, oil prices have dropped significantly, with the global standard Brent falling by 34.76% year-on-year.

Zhao said that low energy use in Europe, partly caused by a mild winter, led to a rise in petrol stores in the EU to levels not seen in the last five years, which made prices go down. Also, China, the biggest oil consumer in the world, has been producing more coal than oil because there isn't enough electricity.

Still, Zhao thinks energy prices may increase in the year's second half if there is a freezing weather event.

BofA says that the average price of steel and iron ore so far this year has dropped 16% compared to the same time last year. The low demand for construction also shows up in other building materials, like cement, which has hit a 75% inventory level.

Iron ore is mainly used to make steel, an important building and engineering resource.

Jim Wiederhold, Director of Commodities and Real Assets at S&P Dow Jones Indices, said that commodities like industrial metals tend to decrease before economic leading signs like PMIs. In the past, this has helped show when a recession might happen. He also said that oil prices tend to "fall sharply when a slump is happening."

"Over the last few months, prices for most major commodities have gone down because businesses and consumers have cut back on buying in anticipation of a possible economic downturn," he said.

Wiederhold went on to say that commodities tend to move in the same way as inflation. And if inflation keeps going down, commodity markets could go down even more in the short run.

The International Monetary Fund says that the overall inflation rate worldwide will drop from 8.7% in 2022 to 7% in 2023.

I'Anson said, "Given that commodities are an early sign, I'd say prices won't get much of a foothold until next year."