Global economic outlook downgrade commodity prices will fluctuate sharply

In the past month, the volatility of commodity prices in listed transactions was unprecedentedly high. Although the recent global economic outlook has been lowered and some commodity prices have fallen, the overall commodity market may still fluctuate in the coming year. According to an IHS Global Insight article on price and procurement prospects, although the trend of the 2008 financial crisis will not be repeated, some events may affect the recent trend of commodity prices.

With the global economic slowdown, IHS currently expects a mild recession in Europe in the fourth quarter of this year. The global economic slowdown will continue until at least the first quarter of 2012 and will indirectly affect the U.S. economy. IHS still believes that the U.S. economy is 40% less likely to fall into recession, but the U.S. economy remains near stagnant and is expected to grow by only 1.7% this year and by 1.4% in 2012.

Indeed, mature economies cannot withstand external shocks. However, the strong corporate finances will help these economies withstand severe financial crisis. And although recent news reports have exacerbated market sentiment, once Europe and US policy makers provide more guidance on the issues of savings and monetary policy, it is expected that the pessimism of consumers and businesses will fade.

However, with the start of the fourth quarter, there are a lot of situations that are strikingly similar to those before the 2008 crisis. Economic news has continued to be bad. Both Europe and the US have committed serious policy mistakes and may trigger a financial collapse, just like what happened after the bankruptcy of Lehman Brothers in 2008. At the same time, IHS believes that no serious financial crisis will occur within a few months. The recent decline in the commodity prices of listed exchanges is mainly due to changes in market sentiment, not due to the deterioration of fundamentals.

The possibility of sharp corrections in commodity prices is high, but it is not inevitable. As the market responds to macroeconomic events, the prices of listed commodities will remain volatile during the rest of 2011. The following three major events are the main risks that may cause commodity prices to plunge as they did in 2008:

IHS Global Insight's GIIMPI is a weighted average of weekly spot prices of major commodities traded globally, including crude oil, ethylene, propylene, benzene, aluminum, copper, nickel, zinc, lead, tin, pulp, wood, rubber, cotton, wool , PX, scrap, DRAM, and ocean freight rates. GIIMPIXTD tracks the price trend of major listed commodities.

Looking at the 2011 index, GIIMPI did not show a steady increase in prices during the first half of 2008. Since prices did not increase significantly in 2011, the possibility of a sharp drop in the next few months is low.

Greek debt disorder disorder IHS Global Insight anticipates that the Greek government will default on debt in early 2012. However, the EU is expected to avoid its development into a global financial crisis. This possibility is 75%. The Greek debt default has evolved into the situation after the Lehman Brothers bankruptcy in 2008, there are also 25% of the possibilities. The disorderly default of Greek debt may lead to the freezing of credit and financial markets, which in turn leads to a sharp correction in commodity prices.

The U.S. Congress’s policy mistakes The U.S. faces a political crisis, not a fiscal crisis. U.S. parties are arguing over federal, state, and local spending, and will hinder U.S. economic growth in the short term. Although it is important to address long-term expenditure pressures, policy makers must act with caution and cannot stifle economic recovery by implementing stringent fiscal savings measures. Increased signs of falling into a political stalemate will only dampen the confidence of businesses and consumers. In view of the fragile state of the global economic recovery, confidence has dropped further and may push the market into danger.

China's Soft Landing According to the IHS company's outlook, China will try to achieve a soft landing, with an economic growth of 8-9% in 2012. Despite the worrying level of local debt, IHS believes that China can achieve economic transformation and make domestic consumption play a more important role in promoting economic growth. Despite this, if China's economy slows down significantly, it will hit the country’s demand for commodities and cause commodity prices to fall.

The decline in the prices of commodities that have recently been listed and traded on the bottom line indicates that market sentiment has changed and does not indicate that market fundamentals have deteriorated. One of the benefits of falling prices is that it eases inflationary pressures in large emerging economies such as Brazil and China. If the aforementioned negative impact does not occur, the decline in inflationary pressure may help the growth of the global economy in 2012.

The author KC Chang is a senior economist in price and procurement at IHS.