Commodity Bust Not Over Yet

The price of copper is down 27% in 2015. This is the worst in 7 years. But copper isn’t the only commodity in a bust.  Commodity-price downturns have lasted on average seven years, but this  time it may be different because of one major economy: China.

Since the late eighteenth century, there have been seven or eight booms in non-oil commodity prices, relative to the price of manufactured goods, though the one that began in 1933 spanned almost two decades.

Major copper suppliers are making only marginal cutbacks to satisfy shareholders, while resisting shuttering operations on the belief they can “tough it out,” Codelco Chairman Oscar Landerretche said.

Everybody is looking at everybody. There’s this waiting game going on and that makes this adjustment a little bit longer. Nobody wants to shut down a mine to open it up again because that’s extremely costly.

Commodity bust: China has the solution

If China’s economic slowdown continues, the commodity downturn is likely to continue because no other economy has the capacity to pick up the demand slack. The U.S. economic expansion is likely to slow soon, as the Fed raises interest rates. And Europe’s relatively recent recovery will probably be moderate and tilted toward domestic services.

Many emerging-economy governments’ understandable aversion to running substantial and persistent current-account deficits will lead them to counter weaker export prices by increasing export volume, even if that drives down prices further.

This commodity-price roller-coaster ride is probably not over yet. While we cannot know for sure what will happen, it would be prudent to brace ourselves for another drop – and do what we can to avoid a crash, noted Carmen Reinhart, professor of international financial system at Harvard University’s Kennedy School of Government, in a Project Syndicate post Thursday.