Global commodities have seen a more than 20% slump compared to the same period last year, as reflected by the S&P GSCI Commodities index.
Jung Getty | Moment | Getty Images
Prices of commodities like crude oil and iron ore have been sliding this year, underlining a continuing economic rout across the globe and possible recession risks, market watchers told CNBC.
Global commodities have seen a more than 25% slump over the last 12 months as reflected by the S&P GSCI Commodities index — a benchmark measuring the wider performance of various commodity markets.
Out of the different baskets of commodities, industrial metals have slid 3.79% during that period (up to June 30), while energy commodities like oil and gas have slipped 23%. Conversely, agricultural commodities such as grain, wheat, and sugar have gained roughly 11%.
But the overall slide for the index is likely pointing to a global economic slowdown and a recession, analysts say, as China’s Covid-19 rebound loses momentum.
“Iron ore and copper are good barometers of the very cyclical portions of the global economy, including construction and manufacturing, of which are in recession in many places,” Kpler’s Senior Commodity Analyst Reid I’Anson said via e-mail.
“It is my belief that this will flow through to a broader decline in economic activity, especially in the West,” I’Anson added.
He foresees that the U.S. will likely see a GDP contraction in the fourth quarter of this year or 2024’s first quarter, and that Europe will follow suit in three to six months.
“The failure of the Chinese economy to live up to the expectations of the market is the biggest reason commodity markets are struggling to find a footing,” I’Anson continued.
China has been posting a slew of economic data that has been weaker than market expectations, pointing to a faltering Covid reopening after years of strict lockdowns. Bank of America analysts confirm that China’s rebound has been weaker than expected.
“Especially for property, investment dropped 7% year-on-year,” said the bank’s Head of Asia-Pacific Basic Materials and Oil & Gas Research, Matty Zhao. A property market decline is often associated with a drop in demand for construction materials like steel, aluminum, copper and nickel.
China’s real estate sector slump is predicted to last for years, according to Wall Street banks. And the Chinese government doesn’t look like it’s going to pursue an aggressive fiscal stimulus package, said I’Anson. Even if it does, “it would need to be sizable to impress markets at this point.”
Biggest losers, and what it means
“Commodities such as industrial metals tend to move lower ahead of economic leading indicators like PMIs and historically have helped signal when a downturn might occur,” said Director of Commodities and Real Assets at S&P Dow Jones Indices, Jim Wiederhold. He added that oil tends to “dip drastically” as a downturn is happening.
“In general, many major commodities slumped over the last few months as companies and consumers reduced their demand ahead of a potential economic downturn,” he said.
Commodities also tend to move in tandem with changes in inflation, Wiederhold continued. And if inflation continues to dip lower, commodity markets could see more downside in the short term, he said.
According to the International Monetary Fund, global headline inflation is poised to fall from 8.7% in 2022 to 7% in 2023.
“Given commodities are an early indicator, I’d say prices will likely struggle to find much footing until next year,” said I’Anson.