COMMODITY CRASH REFLECTS GLOBAL ECONOMIC SLUMP

Commodity crash reflects global economic slump

Brent Jang, The Globe and Mail

8:56 AM, E.T. | February 24, 2015

International

Tags: China, Economy, Euro, euro zone, Greece, Oil, U.S. Economy

Global commodity prices have tumbled to levels below the depths of the Great Recession, underscoring the widespread difficulties facing the global economy.

While crude oil’s price collapse has been in the spotlight, a wide range of other commodities are suffering as well, including natural gas, coal, iron ore, copper, grain and pulp and paper.

The commodity crash is the result of too little demand for raw goods now in plentiful supply after producers ramped up capacity in recent years in anticipation of steady global growth.

But trouble spots are everywhere. Commodity markets have declined during worldwide turbulence as the pace of growth in China continues to slow, Russia grapples with an imploding economy and ruble and Greece struggles through an economic crisis that Europe must solve. Oil’s big drop has hurt many energy-producing countries, including Canada, where low prices are hammering Alberta and reducing growth for Canada as a whole.

The Bank of Nova Scotia’s commodity price index fell to 100.9 points last month, a drop of 27.9 per cent since January, 2014. The index, which tracks a weighted basket of commodities including oil, metals, forest products and agriculture in U.S. dollars, has sunk through levels of the 2008-09 recession to reach its lowest point since January, 2007.

“It’s a lacklustre world economy. It’s a combination of slow demand growth and some capacity expansion,” said Patricia Mohr, vice-president and commodity market specialist at Scotiabank.

“China is a part of the story because the Chinese economy is slowing gradually,” Ms. Mohr said.

Another economic indicator also highlights weak conditions globally. The Baltic Dry Index, created in 1985 as a measure of global shipping, crumbled last week to a record low of 509 points. The BDI’s woes reflect the slump in the shipping industry’s prices to transport dry raw materials over 26 global routes.

Economists watch the index because the amount of raw materials being shipped – from coal to grain to iron ore – provides a key indicator of consumption and manufacturing trends. The index reached a record high of 11,793 points in May, 2008, before diving during the worst of the global financial crisis in 2008-09.

The effects of slower-than-expected global demand and continued ample supplies have translated into tough times for an array of commodities.

“The global economy is slowing, and resource industries are very important to the Canadian economy,” Ms. Mohr said.

Nationally, the Conference Board of Canada predicted two weeks ago that the Canadian economy will expand almost 1.9 per cent this year, down from its previous forecast made in November for 2.4 per cent growth in 2015 and also a decline from its preliminary estimate of 2.2 per cent growth in 2014.

On Monday, the board said Alberta’s economy will be the hardest hit in the country, forecasting that the oil-dependent province’s gross domestic product will shrink 1.5 per cent this year.

“Low oil prices are sending a chill through Alberta’s formerly sizzling economy,” the board said in its provincial outlook. “The sudden collapse in oil prices has significantly altered the economic landscape – in Canada and around the world. Nationally, we expect the impact to be negative. But at the provincial level, it will be highly uneven.”

British Columbia is forecast to lead the provincial pack this year with GDP growth of 3 per cent, followed by Ontario and Manitoba each at 2.9 per cent. British Columbia is expected to thrive due to a diversified economy and a steady influx of new residents from international and interprovincial migration.

If Ontario does perform as well as predicted in 2015 in part due to the lower loonie bolstering manufacturing exports, “this would mark the first year since 2002 in which economic growth in Ontario outpaces the national average,” the board said.

Newfoundland, which has benefited from offshore oil revenue in the past, will get bruised, according to the board’s outlook, which envisages the province’s economy will contract by 0.6 per cent this year. Saskatchewan will also be hurt by lower oil prices as its GDP growth is forecast at only 0.8 per cent in 2015.

Scotiabank’s January oil and gas subindex fell 21.5 per cent from the previous month and is down 52.4 per cent year over year.

Ms. Mohr said the rise of the U.S. greenback against most currencies has had a deflationary effect. She also points to the devalued Russian ruble as one example of ripple effects spreading to North America. Russian newsprint producers have been able to discount their supplies into Asia, which in turn have pulled down North American prices, she said.