Why have commodities crashed?

Commodities have already had a tough 2015 – but earlier this week, prices for everything, from crude oil to industrial metals such as iron ore and copper, plummeted even further.

The sector is contending with the lowest prices since the financial crisis, perhaps even this century. Here is a brief guide to what is happening, how each of the main commodities are faring, and why it matters for global growth.

How bad is this crunch?

Earlier this week, crude oil dipped below $40 a barrel for the first time since 2009. The situation was so dire that the Bloomberg Commodity Index, which covers a wide range of natural resources, dropped to its lowest level since June 1999. After two days of freefall, prices have plateaued, with the oil price managing a brief recovery.

What’s causing the slump?

A combination of oversupply and weak demand have wreaked havoc on the natural resources industry. The growth slowdown in China and other emerging economies such as Brazil has reduced demand for natural resources like steel, iron ore and crude oil. Meanwhile, on the supply side, cheap borrowing costs and a failure to predict China’s slowdown led producers to expand too much in recent years. Now there is a glut that analysts say might continue well into 2016, with prices unable to pick up until global supplies decrease.

Who are the winners and losers?

Falling commodity prices are forcing the world’s mining giants to restructure their businesses in order to stay afloat as they battle declining profits. The market capitalization of the top 40 global mining companies has fallen by nearly $300 billion this year.

The crash is particularly devastating for economies that rely on export earnings from commodities. The oil-producing states of the Middle East, Russia, Brazil and a number of African nations have all been badly affected.

Conversely, in Britain and the Eurozone, low energy prices have benefited both consumers and businesses.

How are the big commodities faring?

Oil: China has been the biggest driver of oil demand in the past decade, so the country’s economic slowdown means bad news for crude consumption. Traders and investors are concerned that the oversupply will persist, with OPEC producers flooding the market.

Copper: Demand for copper in China has been weaker than expected this year, growing by about 2-3%. The metal fell to a six-year low this month, and is trading below the cost of production. Some analysts are blaming the drop on a slump in Chinese infrastructure investment, especially the power sector, which is one of the biggest consumers of copper.

Aluminium: The market for aluminium is oversupplied – global supplies rose more than 10.3% in the first half of the year. Meanwhile prices are trading at the lowest level in six years. China is also switching from being a customer to a producer of the metal, which is putting pressure on Western producers.

Iron ore: This base metal has done better than other commodities over the past few months. It hit a record low in July but has since recovered about 25% thanks to a reduction in exports from Brazil and Australia. However, supply continues to outweigh demand.

Gold: The precious metal has slipped 9% this year and is on track for its third year of losses. Traditionally gold has been viewed as a safe haven for investors, but analysts are watching carefully to see how prices will react to a predicted rise in US interest rates.

Have you read?
A brief history of gold
What is affecting metals prices?
China is still king of commodity consumption

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Author: Rosamond Hutt is a Senior Producer at Formative Content.

Image: A mine in Africa is seen. REUTERS.