Swan's commodity liability

While Australian miners are up in arms over Wayne Swan's plans to hit them with a 40 per cent resource super profits tax, they can hardly have failed to notice the emergence of a far more insidious threat in the form of sharp declines in commodity prices.

In trading overnight, copper – often regarded as the leading indicator of the commodity complex – staged its most dramatic one-day drop since the 2008 financial crisis. Copper prices finished the session 6.4 per cent lower, falling below $3-a-pound level for the first time in three months. The copper price is now about 20 per cent below its peak in early April.

Oil prices also came under pressure, hitting their lowest levels for the year. The oil price has fallen by nearly 20 per cent in the past fortnight, as traders fret over swelling oil and fuel inventories.

The most common explanation for the steep drops in commodity prices – and the prices of most commodities, with the notable exception of gold, have dropped sharply in the past few weeks – is that markets fear that sovereign debt woes that first surfaced in Greece before spreading to Portugal and Spain still threaten to engulf the eurozone.

What's more, there is now huge pressure on the more vulnerable eurozone countries to introduce tough measures to rein in budget deficits by cutting government spending, and raising taxes. As a result, Greece, Portugal and Spain are likely to suffer severe economic contractions, and the eurozone could slip into double dip recession, which will see unemployment rise, while consumption and investment falls. This is bad news for both the United States – which has a strategy of doubling its exports over the next five years to boost jobs - as well as for China, which counts the European Union as its largest export market.

It's clear that both the United States and China are concerned about the potential for the eurozone's sovereign debt crisis to spiral out of control. This week German magazine Der Spiegel carried an account of how both the Chinese and US leaders insisted on the need for urgent action from Europe.

According to the article, German chancellor Angela Merkel was in Moscow's Red Square for celebrations commemorating Russia's victory over Nazi Germany on the Sunday before the eurozone launched its $1 trillion rescue package for its vulnerable members.

Merkel watched the ceremony from the front row, sitting between Russia's Vladimir Putin, and China's Hu Jintao. The Chinese president took the opportunity to quiz Merkel about the efforts being made to save the euro, and to express China's concern about the situation. Merkel reportedly assured him the Europeans would do everything possible to contain the situation.

Later that day, Merkel called US President Barack Obama to update him on the progress of the negotiations. Obama urged the Europeans to adopt a "decisive response” to the situation.

However, Europe isn't the only worry for commodity markets. There are also concerns that the Chinese government's attempts to temper inflationary pressures and put a lid on soaring property prices will prove too heavy-handed, and that Chinese economic growth will be the casualty.

At this stage, it's too early to know whether global growth will be punctured by the eurozone's problems. What is clear is that the steep drop in commodity prices that we've already seen should sound a wake-up call to Swan and the miners. The two camps should hasten their efforts to reach agreement on modifying the resource super profit tax – one that allows the miners to enjoy a reasonable rate of return on their investments before the new tax kicks in, while still ensuring that the benefits of the remaining commodity boom are spread more widely