Commodity bears are growling again, seeing signs in shipping statistics that commodity prices are set to slump.
While commodity bulls are buoyed by “green shoots” in the economy and the general return of optimism about the future, the bears think commodity prices are set to return to last autumn’s levels.
“I remain extremely skeptical of this commodity rally, although it was to be expected as part of the inventory restocking effect,” wrote Daily Telegraph business editor Ambrose Evans-Pritchard in his July 8 post on his blog, which is popular with people who expect economic conditions to worsen.
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“It is not underpinned by real global demand.”
While the main medium and long-term fear of many analysts today is that massive government spending around the world will create an inflationary spiral that will see the prices of commodities skyrocket, commodity bears expect commodity prices to slump as deflation takes hold.
The bulls expect the economy to struggle forward at this level or slightly better, which would allow demand for commodities to continue, whereas the bears think the economy will slump, snuffing out demand.
The spring rally in the stock markets of the world, pushing up equity prices in many places by 40 percent, gave credibility to the bull case, but the bears now point at the recent downturn in the Baltic Dry Index (BDI) as possible proof that the equity rally is about to fail.
The BDI reflects the average cost of shipping goods by sea and is believed to represent world demand for commodities. Just before the commodity market peak of 2008, the BDI plummeted to 663 in December from 11,689 in June. The high number represents high freight costs when ships were busy moving coal, iron ore and other commodities and the low number represents low prices when almost all commodity traffic had halted in the depths of the credit crunch.
Since then the BDI has recovered, reaching back up to 4,291 in early June, but has now fallen to 3,040. This recent setback has the bears anticipating another commodity selloff.
“The Capesize Iron Ore Port Congestion Index – a new one for me, I must confess – is replicating the pattern seen a year ago just before the commodity boom tipped over,” said Evans-Pritchard.
On long-term BDI charts, the recent setback does not appear to be drastic or much different than a similar setback it experienced in March and April.
But for bears like Evans-Pritchard, it is a sign of the economic chickens coming home to roost.
“We are all longing to be bulls again, but we (mankind, especially the West) have a long, hard slog ahead to work off our debt depravities,” said Evans-Pritchard.
More pessimistic sentiments are heard from the mega-bears at Elliott Wave International. They foresee economic collapse, deflation rather than inflation and a sharp commodity slump.
That will drag agricultural commodities down with the rest, they say.
In his Monthly Futures Junctures June newsletter, EWI analyst Jeffrey Kennedy declared that “the party’s over in grains,” calling for corn, soybean and wheat prices to drop down to at least their late 2008 lows.
