What’s Behind the Current Global Commodity Price Slump?

As the year 2014 got underway, it looked as if commodities in general, and energy, in particular, were headed for a boom year. And with an accelerating economic recovery, U.S. Treasury interest yields surprisingly dropping to post-recession lows, along with deteriorating geopolitical turbulence, the first quarter did not disappoint. In fact, the newly-christened Bloomberg Commodity Index (renamed from DJ-UBS Index) reached the best quarter since the beginning of the 2008 recession. In doing so, it far surpassed the stock market’s S&P 500 performance during the first quarter 2014.

But by the middle of May, a remarkable reversal set in, and has followed with a downdraft that brought the Bloomberg Industrial commodities down from the first quarter’s 21% growth peak to a negative 10% drop into the early part of August, with no rebound in sight. The agricultural sector fared a little better, erasing the 10% gain that it had achieved by the end of June.

In analyzing this precipitous turnaround, a combination of lowered demand, and expansion of supply increase in the context of growing world turbulence, seems to be the answer. This is proving particularly puzzling in the energy sector, which makes up one-third of the Bloomberg Index. With four million oil barrels a day lost to the markets due to the OPEC oil nations’ civil strife, demand seems also to have played a role, with China’s reduced purchases, and the cooler than usual East/Midwest U.S. summer also contributing to the cutbacks.

The grain markets, which are enjoying a record growing season, are facing accumulating surpluses at hand as the fall season approaches. Even gold, which seems to thrive in times of global instability, is facing a supply increase of 13%, outmatched by a demand falloff in the high teens.

In this darkening commodity price picture, some industrial metals actually increased. This was particularly the case with nickel, benefitting by major producer Indonesia’s export restrictions, which removed 15% of global supply. But that price rally stalled early in June with the 50% increase fading in late June as supplies became more plentiful.

Copper demand, closely related to residential, commercial, and industrial construction is being sidewinded by China’s re-evaluation of its overbuilding, encouraged by predecessor central governments. Copper represents 7.5% of the Bloomberg Index, and is its most important metal by far.

The surplus of copper, gold, gas, and grains have joined to create a temporary oversupply of commodities that show little, if any, signs of turnaround; this is happening, even as worsening geopolitics in the Middle East and Russia/Ukraine, which normally would indicate upward price pressures, are not manifesting themselves.

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