While market commentators worry whether an economic collapse in Greece could trigger turmoil in financial markets, a slump in commodity markets may be signaling the world is already in a deep recession.
The slump in the Chinese stock market and concern over the Greek debt crisis sent commodities towards multiyear lows. The S&P GSCI—an index which represents a diversified basket of commodities—has been down nearly 40% over the past year and had slumped by more than six percent as of Wednesday, July 8th.
Courtesy of www.Stockchart.com
China is the buyer of everything from iron ore and coal to copper and gold. The latest slump in the Chinese stock markets has darkened the outlook for the world’s second-largest economy, which seems to be slowing down faster than expected.
Crude oil prices hit their three-month low on Wednesday—below $52.00—as the demand for oil tends to be weakened. China is the second-largest oil consumer. If China cuts back its oil demand, oil prices will come under significant pressure. On the other hand, if reached, Iran’s nuclear deal with the international community would add Iran’s crude to the already oversupplied market.
In addition to iron ore’s fall in recent days, the price collapse is being caused by two major factors. First, evidence suggests that the iron ore is oversupplied, as the biggest producers like Brazil and Australia continue to increase their supply in the market. Second, there is a concern that China’s economy is slowing faster than expected.
Aluminum, another metal hit by excess supply, is trading around a six-year low, as are many other commodities. Moreover, the rising of the U.S. dollar has put downward pressure on aluminum prices.
However, some could benefit from the lower prices in commodities; particularly manufacturers. But for commodity investors, the gloomy mood may make it hard to believe that it will be lifted anytime soon, especially with the Chinese economy slowing down.