The world economic paroxysms since October have more than upset the prices of commodities. These had begun to sink before the major U. S. banking crisis but since have slumped into steep decline. The Commodities Metals Price Index was around 192 in May and 132 in October. Such shifts have caused headaches. The mining company Rio Tinto announced it is moving away from long-term contracts with customers and instead selling iron ore through the spot market or hybrid securities contracts. The commodities drop brings relief to purchasers of metals, but no one is saying we are entering months of good fortune.
Indeed, one of the reasons given for the drop in commodities prices is the prediction of world recession, meaning lower demand, meaning lower prices. But metals prices, and commodities in general, are still high by historic standards, and analysts are divided on where they think commodities prices are headed from here. The Economic Times was reporting that analysts believed if copper dropped under $3,100/tonne - the average cost of production -- then the "the copper economy around the globe would go into a tailspin." The London Metal Exchange price on Nov. 19 was $3,500/tonne. Much of last year, and as recently as July, copper was trading at close to $9,000/tonne. Gayle Berry, base metals analyst for Barclays Capital, predicted that base metals prices will continue to slide into the first quarter of next year, but that there they might find a bottom.
David Croson, associate professor of strategy and entrepreneurship at the Cox School of Business at Southern Methodist University, believes the drop in metals prices does not bode well for U. S. valve makers - in two ways. "The drop owes to a decline in demand, which means there will be less demand for valves, which means lower revenue. Second, lower metals prices means valve purchasers will be looking for lower prices, which will tend to lead them to offshore producers whose labor and overhead costs are lower than those of U. S. manufacturers. It's a psychological but very real effect on how buyers make decisions."
Where are prices headed? A posting on Mineweb early in November noted that most analysts believed the world economy would continue to grow, even if just barely [the "western" economies in recession being offset by the "developing country" economies growing] and that this being the case, "when the real picture is understood, there could be a fast and dramatic rise in commodity prices - perhaps not back to the recent bubble-driven highs, but high enough to pull the mining sector out of the current gloom."
Frank Hemsley writing in the Contrarian Profits believes commodities are merely in a correction that is part of a secular bull market. He believes much of the selling of commodities was forced owing to the need to "finance the mess in other sectors." He sides with legendary commodities investor Jim Rogers, who he says, believes this sell-off will only make the commodities bull market longer.
Ultimately, much depends on the Chinese and Indian economies. And China recently announced a two-year $586 billion economic stimulus plan to boost domestic demand. If China can keep growing despite a fall-off in exports to the United States, then commodities prices will remain under pressure to stay high.