Commodity weakness good and bad for Asia

Commodity weakness good and bad for Asia

After a few years of high prices on world markets, commodities have finally succumbed to the law of gravity.

Oil prices are at a 10-month low, with the benchmark Brent crude below US$100 per barrel, while gold has just suffered the biggest plunge in three decades before clawing back some gains over the past week.

Other metals, such as silver and copper, have also slumped, with copper in particular sliding last week by the most since December 2011.

Meanwhile, food costs remain benign. The price of broken rice, a common grade offered by key Asian exporters, fell to US$385 to US$420 per tonne, from last month's US$400 to US$420, according to Reuters.

At first glance, lower commodity prices seem an obvious boon for Asian economies, most of which are net importers of energy and food.

Cheaper commodities boost the spending power of consumers and improve the profit margins of manufacturers that import raw materials such as oil and metals.

But the full picture is more complicated, mainly because the reasons behind the commodity price weakness are mixed.

On the one hand, prices are dropping partly because supplies are more bountiful and secure, says HSBC's co-head of Asian research, Mr Frederic Neumann.

There has been "enormous investment" in copper and iron ore mining in recent years and "lots of new smelters are also pouring out aluminium", he notes.

Asia's rice stockpiles are also at high levels and are expected to rise further when Thailand's healthy contributions hit the market, Mr Neumann adds.

Bumper supplies of oil and booming shale gas production in the United States are also helping to anchor energy costs.

This run-up in commodity supplies will be beneficial for Asia. As Citi's Asia-Pacific economist Johanna Chua puts it: "Most of the region is a commodity importer."

The more industrialised economies of South Korea, Taiwan and Singapore are likely to benefit most from cheaper oil, she says.

But on the other hand, commodity prices are also softening as a result of wobbly global growth.

Indeed, last week's rout in commodity markets was triggered by weak economic data from China and the US, the world's biggest commodity consumers.

Fears of waning global demand for commodities are translating into worries over a similarly tepid appetite for Asia's exports, say economists. To the extent that commodity prices are declining on global growth concerns, the gains from cheaper oil imports are "unlikely to be sufficient to offset the drag from slower external demand" for Asia's shipments, Ms Chua says.

Fortunately, the pause in China's growth - the world's second-largest economy slowed to a smaller-than-forecast expansion of 7.7 per cent in the first quarter - is not expected to lead to a lengthy slowdown.

With the US also still firmly on the road to recovery, the pros of lower commodity prices could ultimately outweigh the cons.

"For Asia, we think of the tumble in raw material prices as a mild positive," says Mr Neumann, who is projecting a "gradual pick-up in growth over the coming quarters, led by China".

Not all regional economies will benefit equally, though. Malaysia and Indonesia, both net exporters of energy and palm oil, will be hurt by falling commodity prices.

However, for the rest of ASEAN, including Singapore - where growth has been "most disappointing" - cheaper commodities should generally be positive, adds Mr Neumann.

Another consideration is that lower commodity prices may renew worries over increased capital inflows into Asia.

By lessening inflationary pressures, cheaper commodities are allowing central banks around the world - in particular those of the US and Japan - to step up already aggressive money-printing activities, Barclays economists say.

The capital injections are likely to find their way to Asia's emerging economies, at a time when asset prices are already elevated.

But even here, there is a silver lining. If further monetary easing helps rebalance the US and Japan economies and position them for more growth, weaker commodity prices could turn out to be more of an overall boon than a bane.

fiochan@sph.com.sg


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