Spotlight on global commodity markets

Export Finance and Insurance Corporation (EFIC) senior economist Dougal Crawford examines developments in world commodity markets …

A couple of factors influencing world commodity markets at the moment are the slowdown in China and drought in Russia.

The Chinese slowdown looks to be the more powerful factor. The drought in Russia and a decision by the Kremlin to impose an export embargo, have driven world wheat prices up. But unlike during the so-called global food crisis of 2008, this time worldwide grain stocks are plentiful, so the price spike may prove short-lived.

The development to watch more closely is China.

The major advanced economies are stuck in the doldrums, so China has become the incremental consumer of most minerals – iron ore, copper and nickel plus the world’s largest energy consumer.

Yet it is slowing as the mammoth fiscal and credit stimulus that Beijing gave to the economy last year starts to fade.

Already Chinese import volumes of iron ore, coal and copper are down by at least 10 per cent from March and spot prices of coking coal and iron ore have slipped below current contract prices.

So despite the wheat surge the outlook for commodity prices is softening.

The global financial crisis hasn’t just laid low US sub-prime mortgage borrowers and North Atlantic financial institutions which bought mortgage-backed derivatives. It has hit a much wider range of highly-geared entities.

Russia, Vietnam and Dubai are all struggling in various ways to make ends meet in their budgets and to restore their reputations with creditors and ratings agencies.

Australian mining companies are showing renewed interest in developing rich iron ore deposits in West Africa, but political risks and infrastructure challenges will constrain progress.

In Kenya, a new constitution holds out the promise of diffusing ethnic tensions that erupted into violence after a contested election in 2007. But it has also challenged the interests of some groups, and they could react violently especially at elections scheduled for 2012.

*EFIC provides finance and insurance solutions to help Australian exporters overcome the financial barriers they face when growing their business overseas.

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