Have commodity prices seen the bottom already or is there some more pain left? This is the question agitating the minds of almost all stakeholders in the commodity supply chain.
As is well known, there is a strong positive relationship between economic growth and consumption of certain commodities, often referred to as growth commodities. Energy products such as crude oil and natural gas as also industrial metals such as steel and copper are good examples.
Growth commodities hit
With the spread of the Covid-19 pandemic, most of the growth commodities have taken a big hit, primarily because of fears of the world economy moving towards recession following lockdown of cities, stoppage of international travel and substantially slowing global trade.
Major economies, including the US, China and Europe, are all facing the onslaught of the dreaded coronavirus. It is as yet unclear how soon the pandemic will come under total control around the world. Meanwhile, major economies have announced a series of monetary policy measures, including sharp reduction in interest rate and substantial enhancement of liquidity in addition to fiscal stimulus.
This firefighting is of course necessary to stem the growth plunge. There is a ray of hope from China where the worst of Covid-19 seems to be over.
After a disastrous two-month period till February, business activities have begun to recover. China’s latest PMI (Purchasing Managers’ Index) for the manufacturing sector as well as for the services sector has improved.
However, the world has still a long way to go before it starts to function normally. Despite recovery in China’s economic activity, a big surge in demand is unlikely to materialise any time soon because other economies – exporters to China and importers of Chinese products – are yet to recover from the pandemic.
So, there are supply side and demand side challenges. For instance, many mines across geographies are closed or have cut back production. So, raw material availability is tightening. Similarly, many countries that import Chinese products are not yet ready for business.
So, after a disastrous first quarter, one may have to await developments in the second quarter in terms of success in containment of the pandemic and countries getting back into recovery mode.
It may be premature to assert that the worst is over for the global commodity market.
Crude woes
The worst performer has undoubtedly been crude oil with prices falling to multi-year lows. Brent has fallen below $25 a barrel and WTI briefly slid below $20 a barrel, a situation unthinkable at the beginning of this year.
The writer is a policy commentator and global commodities market specialist. Views are personal