Commodity markets limp into 2015

Lisa Steyn

Resource prices have plummeted this year, leaving some economies reeling in the aftermath.

A freefall in commodity prices has come to a head at the end of 2014 as crude oil, iron ore and coal prices, among others, took a significant tumble and served to bring one global giant – Russia, the world’s ninth-largest economy – to its knees.

The problem facing most resources is that high levels of production have seen supply outstrip global demand, resulting in low commodity prices. Resource giants with low production costs will weather the storm until supply tapers and prices pick up again. High cost producers will probably fall over.

 

 

The commodity fall can largely be attributed to slowed demand from China which is switching from an investment-focused economy to a consumer-oriented one.
Iron ore, a key component of steel, has been particularly hard hit, dropping from $136 a tonne to $73. South African export coal prices have fallen from $84 a tonne to $65. Platinum has dropped from $1 400 an ounce to near $1 200. Copper kicked the year off at $7 400 a tonne, but ended it at $6 300.
“For most of the metals markets, 2014 has been a year of adjusting to the rebalancing in the Chinese economy. Demand growth is still positive, but it is simply slowing,” said Grant Sporre, a commodities strategist at Deutsche Bank.
Currency despair
The most dramatic price move this year was that of crude oil and had little to do with the slowdown in China when it crashed from more than $110 a barrel in July to below $59 in recent days, causing a crisis in the Russian economy. Russia’s oil production cost is $105, according to the Guardian.
Oil producers in the Middle East, seeking to secure market share in light of a natural gas boom in the United States, have taken a decision not to cut supply for now, prompting estimates that the price could slide further to $40.
Consumers have rejoiced in the news but substantially negative impacts became clearer this week in Russia when the central bank, following an emergency meeting at 1am on Tuesday (in response to a plummeting rouble which lost 49% of its value this year), announced it would hike its key interest rate from 10.5% to 17%.
The move did not stop the currency from falling further on the day, as much as 19% according to Bloomberg, before an announcement that Russia would sell its foreign currency reserves saw the rouble recover. Still, media have reported that Russian banks are running out of foreign currency as people bring in piles of cash to swop. According to the Wall Street Journal: “Sberbank, Russia’s state savings bank, and Alfa Bank, Russia’s largest private lender, said they were ­experiencing a rush for dollars and euros.”