Falling Commodity Prices Could Hit Emerging Markets… Again
After years of volatility, 2016 turned out to be a year of stability for commodity investors with all the main commodities rising in price thanks to improving market sentiment and optimism about global economic growth. Unfortunately, 2017 has not seen a continuation of this trend with falling commodity prices b being the recent trend.
Year-to-date key commodities such as iron ore, copper, coal and oil have all fallen in value and retreated from their year-to-date highs.
Once rising, Falling Commodity Prices and that could hurt emerging market countries bernswaelz / Pixabay
Falling Commodity Prices – Emerging Market Impact
Spot iron ore is leading the charge with a YTD decline of 16%, followed closely by New Castle coal (-14%) and Brent (-13%). Aluminum, copper, zinc and gold have all put in positive YTD performances, but all are below YTD highs. Copper and Zine are down by more than 10% of yearly highs.
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According to analysts at Deutsche Bank, a variety of reasons are being provided for the ongoing commodity shock. Macro factors such as a slowdown in China growth from the highs in 1Q & financial deleveraging as to idiosyncratic factors such as elevated production/inventory in oil, development in Philippines for nickel and a decline in net long positions for most non-ferrous metals are all being blamed with no one factor seemingly behind the bulk of the declines.
In a commodities report published earlier today, Deutsche’s analysts comment that while no one catalyst seems to be to blame for the recent declines, it doesn’t look as if commodity prices will stop their slide anytime soon. Specifically, the team writes:
“It feels this correction might have more legs in the near term as China’s deleveraging efforts is showing no signs of easing. Obviously the upcoming OPEC meeting at the end of this month will be important to watch in this context. We did enter 2017 with a cautious stance on oil and comparatively sanguine on non-oil commodities; the latter is clearly being challenged at this point, though we expect it to eventually play out over the course of this year.”
But what does this mean for emerging market growth? Emerging markets are highly geared to commodity prices and output, and continued weakness in the market will undoubtedly hit economic growth and productivity. Falling Commodity Prices are good for Asia and bad for the rest of emerging markets, not just from a macro perspective but even in terms of market composition.
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So far this year, emerging markets have outperformed in the analysts “won’t be surprised to see that reverse” as the commodity rout continues. Some companies will fare better than others in this environment, but overall it seems an approach of sitting on the sideline is favored.
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