From SCDigest's On-Target e-Magazine
June 13, 2012
Supply Chain News: Weak Global Economy, Strong US Dollar, Combined to Give Most Commodity Prices a Pounding
Many Prices Down 20% or More in Past Year, with May’s Slide One of Sharpest Ever; CRB Commosity Index Down 17% from 2012 Peak
SDigest Editorial Staff
A variety of factors is working to drive down the prices of commodities worldwide, bringing good news to supply managers and the corporate bottom line relative to input costs, though a weakening economy may not be worth the benefit.
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Not only have commodity prices overall dropped this week by about 17% from their 2012 peak in late February, but the trend has really been down despite some spikes off and on for the past year as well.
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What Do You Say?
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Europes financial worries continue, with the threat of a disintegration of the Euro as well as other potential disasters looming. That has driven investors to move to the relative safety of the US dollar, strengthening its value.
That is among the reason commodity prices are swooning, as most commodities are priced in dollars across the globe. That combined with general concerns about global economic growth, which has clearly been declining, with recession in much of Europe and slowing growth in former high flyers China and India, both big buyers of many commodities, and commodity prices have been sent tumbling in recent weeks.
The most prominent has been the price of oil, with West Texas Intermediate down into the low $80s this week, down from more than $110 per barrel in February, staying at near that level until near the end of April. It has fallen sharply ever since, down about 27% from the peak, with most of that drop occurring in May, the sharpest monthly overall price drop since the collapse of Lehman Bothers in fall of 2008 and the start of the financial crisis and deep recession.
The price drops have hit nearly every category, including agricultural products and the metals. Corn, copper, lead, cocoa and coffee have all dropped by more than 5% in May. Prices of corn, cocoa, oats, cotton, rubber, coffee, aluminum, silver, zinc and nickel are all more than 20% lower than a year ago at this time.
While cotton prices are down nearly 50% over the last year, they have actually been recovering a bit lately, while copper prices are down by nearly 20% for the year.
Even with this recent drop, however, commodity prices are still generally high by historic standards, and well above levels nearly four years ago, when commodity priced plummeted as the recession started.
(Sourcing and Procurement Article Continues Below) |
In an investment note this week, Goldman Sachs argued that oil and some other commodities are poised for a rebound. "Although the macroeconomic backdrop still remains uncertain, particularly in Europe," the bank said, "we believe that the price risks are now shifting more to the upside."
The well-known CRB commodity index, which combines a basket of more than two dozen different tracking measure, tells the tale, as shown in the graphic below.
CRB Commodity Index over the Past 12 Months
What is interesting is that not only have commodity prices overall dropped this week by about 17% from their 2012 peak in late February, but the trend has really been down despite some spikes off and on for the past year as well.
So where do we go from here? Some observers believe that commodities are unlikely to go much lower. A recent Goldman Sachs investment note said that "Although the macroeconomic backdrop still remains uncertain, particularly in Europe, we believe that the price risks are now shifting more to the upside." In other words, prices are more likely to be heading up than down.
But Europe really is the question, as a major currency collapse there would drive demand even lower and send more money into the US dollar.
Will such a crisis be avoided? That is the trillion dollar question.
Are we near a bottom in commodity prices? Or is there still more to go? Let us know your thoughts at the Feedback button below.
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