Prices of nearly all commodities fell heavily last year. The world is producing too much supply as a result of the mining construction boom and constant development of new production techniques and technologies. This hit share prices in Australia’s over-weight mining sector, and it also battered tax revenues, sending the government budget into another huge deficit, and adversely affecting consumer and business confidence and spending. What has this meant for costs, stocks and the commodities industry?
Lower commodities prices are generally a good thing (save for one ‘but’ below). Everything we use day to day is made from commodities, so lower commodities prices reduce the cost of everything we buy and consume. Lower commodities prices mean lower costs for energy and raw materials for manufacturers, and this favours commodities importers and manufacturing exporters like the US, Western Europe, Japan and China.
There is a view that a resurgent US oil industry and traditional low cost supplier and ally, Saudi Arabia have made a concerted attempt at flooding the oil market with excessive supply, in part as political gamesmanship on the Russian oil industry which is borderline profitable at current market prices.
The recent rapid decline in oil prices has also seen impressive gains in airline stocks which have gone unloved for much of the recent past. The downturn has provided an immediate lift to profitability and will also allow airlines which have forward hedging strategies the opportunity to benefit from this pricing far into the future.
Falling prices are also causing mines to be closed and new resource projects to be delayed, scaled back or abandoned. At the same time global demand for most commodities is falling for a variety of reasons, both cyclical and structural.
Focusing on iron ore, it was interesting to note both Colin Barnett (West Australian Premier) and Ivan Glasenberg (Glencore Chief Executive) were particularly vocal in damning BHP and Rio Tintos continuing focus on sales volume and maintaining market share which resulted in significant price decreases through market oversupply.
Mr Barnett’s ‘remember who your landlord is’ speech highlighted the fall in iron ore royalties being received by WA as a result of the price falls. As these royalties are a significant source of funding for WA these reductions will no doubt reverberate around the local economy.