No Downside Limit to Metal Prices’ Slide

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China’s manufacturing sector numbers fell to a six-and-a-half-year low of 47 in September, adding worries over the world’s largest consumer and producer of commodities.

Boom Goes Bust

The commodities boom that started in the early 2000s has clearly come to an end, sending metal prices to the floor. The question now is: How low can they go?

Base metals ETF near lows of 2009

The base metals ETF near its lows of 2009. Graph: MetalMiner analysis of data.

Industrial metals have fallen significantly since 2011 and if this continues, they will soon tie the lows of 2009. Many analysts expect to see prices falling only to the the lower levels of the US recession, arguing that prices should find a bottom soon. However, we believe that we are in a completely different market and there is little to compare it to.

Free Sample Report: Our Monthly Metal Buying Outlook

All the global production capacity that was built up over the last decade to meet China’s impressive growth is now caught up in a demand slowdown. China now consumes almost half of the world’s demand for commodities and the massive glut of material created by falling demand is something never seen before.

Further For Oil to Fall, Too

The excess supply is especially germane to the issue of sinking oil prices. Enhanced drilling techniques have added to increasing oil production which, in the face of falling demand, has driven oil prices 60% below last year’s levels. The collapse in oil prices has had a huge negative effect on emerging economies as 8 out of the 10 top oil-producing countries are smaller, emerging economies.

Free Download: Latest Metal Price Trends in the September MMI Report

China’s exports plunged in 2008 during the financial crisis. In response, China launched a massive economic stimulus program, investing in housing, public infrastructure and rural development projects. Since then, in order to maintain its GPD growth rate, the government has kept up unnecessary high spending.

The unsustainable bubble of construction and development has led to the corresponding bubble in raw materials demand until the point where we don’t know how many empty cities and malls China can build.

What This Means For Metal Buyers

The global economic pain caused by a slowdown in China might or might not be worse than what we saw in 2008. However, what seems clear is that, on the commodities side, things could get much worse.

With global metal production highly dependent on China, the damage that we might continue to see in metal prices could be unprecedented. We can’t mark a limit to this downside…

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