COMMODITIES - SWIMMING NAKED AS TIDE GOES OUT
By Ruma Dubey
Warren Buffett’s famous quote, "Only when the tide goes out do you discover who's been swimming naked” seems so apt for the commodity prices right now. China is the tide – when it was high tide, all commodities made merry and now that there is ebb, most are left naked, left to bake in the sun and wither away.
It is not just oil which is down, most industrial prices have literally jumped off the cliff. The money printing rampage has cooled down and we cannot China alone for the crisis that we are in today. All central banks have kept their economies propped up, creating bubbles. Now these bubbles are bursting, naturally, things are going to come crashing down, messing up the floors.
Amongst all this falling off, the worst hit have undoubtedly been the metals – take any metal and they all are hurting. Copper, which is recognsied as the barometer of the economy recently hit a 6-year low. Nickel and aluminum – other two base metals are also close to their six-year lows.
The worst hit is probably iron ore – it has been literally bludgeoned to death. The main ingredient for making steel, with China’s demand for steel going down dramatically, iron ore prices are expected to remain under pressure – Chinese premier has said that their aim will be to cut overcapacity. Goldman reduced its price forecasts in December, raising the possibility that the iron ore industry faces a long period of hibernation.
This precipitous fall in commodity prices is affecting countries, right till the grass root levels. Take this case in India itself. Loha Mandi or Mandi Gobindgarh near Ludhiana, till a few months ago was bustling small town, with trucks and people milling the streets. The drone of machines, the smell of metal was omnipresent. But today, the town has fallen silent. This hub of the Indian steel industry is today literally out of business, the factories have downed their shutters. Some 400 steel mills have closed down over the past two years and migrant workers, which formed the majority of population of Loha Mandi, have all but migrated to other towns, in search of other jobs.
This is probably the scene in almost all small towns across India. Many of these towns serve as hubs for various industries and now because of the overall slowdown, most of these towns wear a deserted look. There is no fresh investment coming in. Unemployment is on the rise and skilled workers are once again looking Gulf wards to earn a living as living at home in no longer a viable option. Thus when we analyze any company or industry, sitting in the cool confines of our rooms, it is impossible to fathom the slowdown has trickled down to all corners of India, affecting so many lives, changing it irrevocably forever.
That’s not all. This is leaving a telling effect on the currencies too. Countries right from Chile and Angola to Australia and New Zealand have depended on the Chinese for orders – all are facing a run on their economy and this is putting immense pressure on the currencies.
This is the sixth year of a tight beat hug for the commodities market. Will the hug tighten further or will things get better? It looks like there is some way more to go. Firstly, China will be building infrastructure – especially its ‘one belt one road’ project. This could take off in the second half of 2016 and some orders at least could start trickling in. Secondly, historically, it has been seen the dollar has to run south for commodity to walk up north. That is not happening right now but the Fed itself wants a weaker dollar to make its exports more competitive. And this could happen only if the promised rate hikes – around four of them, do not happen in 2016. Thirdly, mining and metal companies have started cutting down production. This is the only way to correct the mismatch between supply and demand. Once again for that to percolate down will take a while. Last but not the least, oil prices. If crude continues to drift southwards, commodities will also move with crude.
Thus for commodities, looks like the pain will persist for some more time to come. Hope by then the bear grip does not tighten to such an extent that it sucks out life itself.