MARKET-TRADED commodities are about to close out one of their worst months ever, but the impact on Australia's resources boom and its major players is still uncertain as Europe searches for a way out of its sovereign debt cul-de-sac. Crucially, the prices of Australia's two most import export commodities, coking coal and iron ore, have not yet cracked.
Copper fell another 2.7 per cent on Wednesday night to extend its price dive in September to 23.9 per cent, and at about $US7000 a tonne it is more than 30 per cent below its 2011 high.
Aluminium fell another 1.4 per cent to be down 10.8 per cent in September, 21.2 per cent below its 2011 high. Nickel fell by 1.3 per cent, to be 17.7 per cent down in September, almost 38 per cent beneath its 2011 high, and 37.6 per cent lower for the year.
Gold and oil are still up for the year, by 13.2 per cent and 9.3 per cent respectively. But they have also been swept up in the September selloff, losing 11.9 per cent and 9.8 per cent of their value respectively. Silver has been hit even harder, losing 27 per cent this month, and erasing all of its gain earlier in the year.
The massive reversals are another signal of the global market's fear that Europe is about to trigger a global recession by failing to defuse its sovereign debt time bomb in time, and the odds on a European debt disaster are changing daily.
Hopes earlier this week that a way had been found to quickly beef up Europe's sovereign bailout fund to about ?2 trillion ($A2.8 trillion) have faded, after the European Union-controlled European Investment Bank's denial that it is planning to participate in an expanded bailout funding exercise.
This is a setback. It was reports that the IEB would help compile the ?2 trillion war chest that sparked the market rally earlier this week.
But the resumption of talks between Greece and the International Monetary Fund, the European Central Bank and the European Union is renewing hope that some sort of deal that avoids a full default by Greece for the time being is possible.
Parliamentary votes by the 17 core EU nations who must sanction an already negotiated lift in bailout funding from about ?250 billion to ?440 billion along with an expanded suite of bailout powers also appear to be still on course: Finland's Parliament approved the expansion of the European Financial Stability Facility by a surprisingly large majority on Wednesday night, and the German Parliament seemed ready to give its assent last night.
But it is an agonisingly slow process. EU finance ministers are due to meet early next week to discuss possible ways to boost the bailout kitty to ?2 trillion or more, enough to defend Italy and Spain from any bond-market selling attack in the wake of a Greek debt default or major debt reconstruction involving debt write-downs.
Steps to actually create the larger bailout buffer cannot be taken until the already agreed expansion of the bailout fund to ?440 billion is approved, and in a report on Wednesday Citigroup told its clients that even a problem-free plan would not come to fruition until the end of October at the earliest.
Citi also sharply downgraded its forecasts for world growth. The investment bank now believes that Europe will fall into recession even if an accelerated sovereign debt restructuring occurs.
The commodity price plunge that is accompanying downgraded economic growth forecasts has not yet pushed the prices of Australia's key export commodities into red-light territory, however.
Coking coal averaged $US146.80 a tonne in the year to June 30. Recent contracts have been set below those struck earlier this year after coal production in Queensland was disrupted by floods, but they are still well above the 2010-11 average, at about $US285 a tonne.
Iron ore prices averaged about $US157 a tonne in 2010-11, and are now being set at $US170 a tonne. To put that in perspective, the iron ore miners were getting just over $US70 a tonne in 2006-07, just before the onset of the global crisis.
Despite its slump, copper is also still selling at prices that are broadly in line with those that applied during the 2006-07 boom, and slightly above the average price the miners received in 2010-11. Aluminium and nickel are also at levels that broadly match the average price in 2010-11.
And while metal stocks have been rising, most are still tight. Copper stocks have risen from about 100,000 tonnes to 466,000 tonnes since 2008, for example, but consumption has been running at more than 21 million tonnes a year.
There are two big unknowns. The first is whether the price declines will cut the production growth pipeline, and put a floor under prices. At this stage, it's too early to tell.
And the second is to what extent China's demand can hold up as growth in the Western world slows.
The consensus among market analysts is that it can, for the time being. Australia's commodity exports are also tied to China's domestic construction expansion rather than the manufacturing export sector that is exposed to a Western world slowdown.
But in a Bloomberg poll released yesterday, 59 per cent of those surveyed saw China's growth rate slowing from 9.5 per cent to 5 per cent by 2016. And 12 per cent of them believe the slowdown will happen within a year: if those bears are right or even close, commodity prices will fall further, iron ore and coal will be roped in, and Australia's resources boom will be in trouble.
mmaiden@theage.com.au
Frequently Asked Questions about this Article…
Why have global commodity prices plunged recently and what does it mean for investors?
Commodity prices have tumbled largely because markets fear Europe’s sovereign debt problems could trigger a global slowdown. Headlines about uncertainty over expanding the EU bailout fund and mixed signals from European institutions have sparked broad selloffs across metals and energy. For everyday investors, that means higher volatility in commodity-linked stocks and funds and the need to watch macro developments (Europe bailout talks, growth forecasts) that can quickly swing prices.
How have key metals performed this month and year (copper, aluminium, nickel, gold, silver, oil)?
The article reports steep moves: copper plunged about 23.9% in September to roughly US$7,000 a tonne (more than 30% below its 2011 high); aluminium fell 10.8% in September (about 21.2% below its 2011 high); nickel was down 17.7% in September and about 37.6% lower for the year. Gold and oil remain up year-to-date (around +13.2% and +9.3% respectively) but lost 11.9% and 9.8% in September, while silver fell about 27% this month.
Are Australia’s most important export commodities—iron ore and coking coal—still holding up?
Yes. According to the article, coking coal has held up and averaged US$146.80 a tonne in the year to June 30, with recent contracts still well above the 2010–11 average at about US$285/tonne. Iron ore averaged about US$157/tonne in 2010–11 and was being set around US$170/tonne. The piece notes those prices haven’t “cracked” yet, so Australia’s resource sector hasn’t been hit as hard as some other commodities.
Could Europe’s sovereign debt time bomb cause a global recession and further pressure commodity prices?
Yes — that is a central concern in the article. Market participants fear that a failure to defuse Europe’s sovereign-debt problems could tip Europe into recession and weigh on global growth. Citigroup has downgraded world growth forecasts and warned Europe could fall into recession even if a restructuring occurs. That scenario would likely put further downward pressure on many commodity prices.
How much do China’s growth prospects matter for commodity prices and Australia’s resources boom?
China is crucial. The article says most analysts believe China’s construction-led demand can support commodity exports for now, but a substantial slowdown would hit prices. A Bloomberg poll cited found 59% expect China’s growth to slow from 9.5% to 5% by 2016; if that happens, iron ore and coal prices could fall further and Australia’s resources boom would be at risk.
Are inventories and production likely to cushion or worsen the fall in metal prices?
There are two big unknowns. One is whether the price declines will curb the production growth pipeline — if production is cut, that could help set a price floor. The article notes inventories have risen (for example, copper stocks climbed from about 100,000 to 466,000 tonnes since 2008) but consumption remains large (more than 21 million tonnes a year), so it’s too early to tell whether stocks or production cuts will stabilise prices.
What policy developments should investors watch that could affect commodity markets?
Investors should monitor progress on European bailout plans (expansion of the European Financial Stability Facility, possible EIB participation, and any move toward a larger €2 trillion backstop), parliamentary votes in core EU countries, and any official timetables. The article notes hopes of a quick boost to the bailout fund faded after an EIB denial, while EU talks and votes (Finland, Germany) and meetings of EU finance ministers will be key. Citigroup warned even a smooth plan might not materialise until the end of October at the earliest.
What practical steps can everyday investors take now amid commodity market volatility?
Stick to basics: review exposure to commodity-linked assets, consider diversification across sectors and regions, and keep an eye on leading indicators cited in the article — European debt negotiations, China growth data, commodity price trends (especially iron ore and coking coal for Australia), and inventory reports. Given the uncertainty, a cautious, long-term approach—or discussing options with a financial adviser—can help manage risk.
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