Bloomberg New York
LOWER fuel prices are compounding the longest commodity slump in a generation.
Because energy accounts for as much as half the cost to produce food and metals, all sorts of commodities will keep dropping, according to Société Générale (SocGen) and Citigroup. With inventories ample and slowing economies eroding demand, cheaper oil lowers the price floor for mining firms and farmers to remain profitable.
Maize may drop another 3 percent, cotton 6.5 percent and gold as much as 5 percent, SocGen estimates.
Costs are falling as surpluses emerge in copper and sugar and as the economy slows in China, the top consumer of energy, metals, pork and soya beans. The Bloomberg commodity index of 22 items is heading for a fourth consecutive annual drop, the longest slump since its inception in 1991. Brent crude, petrol and heating oil are the biggest losers as an increase in US drilling led to a price war with Opec producers.
“There’s been a structural change in oil, and there’s more to come,” Michael Haigh, the head of commodities research at Paris-based SocGen, said. “This will also ripple through other commodity markets.”
Brent crude has tumbled 41 percent since the end of June to $66.47 (R760.16) a barrel as US output jumped to a three-decade high. The price yesterday touched $65.29, the lowest since September 2009.
The Bloomberg commodity index fell 12 percent this year. The MSCI all-country world index of equities gained 3 percent, while the Bloomberg dollar spot index climbed 9.7 percent.
Consumers benefit
Falling oil prices would be a boon to consumers who could expect to pay less for food, Citigroup’s Aakash Doshi said in a December 3 report.
About 45 percent of the operating expenses of growing and harvesting rice comes from inputs such as fuels, lubricants, electricity and fertiliser, according to a US Energy Information Administration analysis of US Department of Agriculture data. Energy accounts for about 54 percent of costs of maize and wheat.
Energy makes up 30 percent to 40 percent of operating costs for mining, according to Citigroup. The bank estimates that a further 20 percent drop for oil, along with gains for the dollar, will cut thermal-coal costs by 13 percent and iron ore by about 6 percent.
Cereal maker Kellogg expected “relatively benign” commodity inflation, chief financial officer Ronald Dissinger said on October 30. The slump in oil would make some cotton fabric cheaper, Bryan Timm, the chief operating officer of Columbia Sportswear, said in October 30 conference call.
Not all commodities will benefit from cheaper oil. While energy accounted for about 40 percent of the cost of making aluminium, most of that fuel was coal or hydro-electric power, which had little or no relationship with crude prices, SocGen’s Haigh said in a report last month.
This year’s oil slump may have come too late to benefit US farmers. Growers usually buy tractor diesel, energy-based fertilisers and pesticides well before the harvests, which started in September for the biggest crops, maize and soya beans.
That meant prices would need to remain lower for months to reduce farming costs for next season, Michael Swanson, a senior agricultural economist at Wells Fargo, the biggest US farm lender, said last month.
Surplus
What was happening in oil might be separate from other commodities, David Rosenberg, the chief economist at Gluskin Sheff, said. Crude was dropping because of too much supply so better economic growth should mean buoyant consumption for other raw materials, he said.
Opec last month kept its output target unchanged even after the steepest slump in oil prices since the global recession. The fracking boom has sent US output up 33 percent in the past two years to 9 million barrels a day, contributing to a global surplus that Venezuela on November 27 estimated at 2 million barrels a day.
Cheaper oil impacts commodities in more ways than just reducing production costs. It is also damping the outlook for rising consumer prices, according to Jeff Sica of Sica Wealth Management.