One might expect the turbulent political economy to cause a spike in commodity prices but thus far such a reaction to the many global threats has not materialized. In fact, the opposite has occurred as we see commodity prices coming down across the spectrum. The Bloomberg Commodity Index, which tracks prices for 20 commodities fell to its lowest point in four years. Industry analysts point to over-supply and a general lessening of demand for many products, including iron ore and crude oil. WTI is down to $93 per barrel and Brent at $97 per barrel.
Of significance is declining demand for iron ore in key markets. For instance, iron ore delivered to China is at a five-year low and in Australia, iron ore prices fell below $79 per ton. To compound matters, at this time when the market is already suffering from too much supply and tightening demand, the major miners are increasing their production. China’s market has tightened considerably as steel producers have slowed down. Furthermore, according to the China Iron and Steel Association, China’s overall economic slowdown is contributing to the bleak picture faced today by iron ore producers. Major minors, such as BHP and Rio, have reduced their production costs to $20-30 per ton, allowing them to lower prices, serving only to hurt worldwide producers saddled with higher production costs, such as Mexico, China, Iran, Indonesia and Africa. Even Chinese miners are churning out increased product, by as much as 10%, in spite of all the reasons to do otherwise.