Paul Bloxham, Chief Economist at HSBC, notes that commodity prices have fallen in recent weeks, led by oil, iron ore and copper and market observers are getting nervous.
“Just as last year’s commodity price rally signalled improving global economic conditions, could the sell-off portend a downturn? It is, of course, too soon to tell. Importantly, though, there are good reasons on the supply side to believe that the price falls are not signalling a sharp fall in demand. For oil, the main story is that higher prices are bringing US shale producers back to life and that there could be global oversupply, not weak demand.”
“Iron ore supply is also ramping up and, so much so, that the decline in iron ore prices had been widely anticipated. Finally, the ending of strikes at the world’s largest copper mine in Chile is set to boost copper supply, so, again, it is not necessarily a demand story.”
“To the extent that the price fall does reflect weaker demand, it is almost certainly a China story, given that China dominates metals consumption. But this would not be surprising. Indeed, HSBC’s China economists are already forecasting that China’s growth peaked in Q1 at 6.9% and will ease through the year to 6.6% by Q4. At these rates, China’s growth is still pretty hefty.”