LONDON - Falling demand, rising production and faltering growth in the world's second-largest economy China have sent many major commodities plummeting to their lowest level since 2009, with some experts predicting the start of a new cycle.
Oil prices this week dived to 6.5-year lows
Oil prices this week dived to 6.5-year lows as commodities tumbled over concerns that China's slowing economy will curb demand for metals and other vital raw materials which have helped feed its astonishing growth over the past three decades.
China's shock devaluation of the yuan two weeks ago stoked fears about its economic expansion, sparking a slump in world equities and sending commodities, as measured by the Bloomberg Commodity Index of 22 raw materials, to a 16-year-low on Monday.
Base or industrial metals were among the hardest hit, with aluminium and copper striking six-year lows, while lead and zinc touched their lowest levels in more than five years.
Copper prices had already collapsed late last week under the key barrier of $5,000 per tonne for the first time since 2009.
"Investor sentiment towards commodities has rarely –- if ever –- been more negative. However, the recent sharp falls in prices can largely be seen as the continuation of trends in place since 2011. The main difference is that oil, previously an outlier, has caught up," said Julian Jessop, head of commodities research at Capital Economics.
For Jeff Currie, who heads commodities research at Goldman Sachs, it is a case of history repeating itself from earlier periods of slumping commodity prices.
"We are witnessing a market cycle similar to what we witnessed in the mid-1980s, and there are real economic reasons why.
"Both cycles were driven by large increases in supply, and while there was some slowdown in demand, demand did not contract. Oil demand today is still growing. The drop in oil prices over the past few months is supply driven," Currie said.
Return to normalcy
Brent North Sea crude and the US benchmark West Texas Intermediate (WTI) collapsed Monday to their lowest level since the 2008 financial crisis, sinking to $42.23 and $37.75 per barrel, respectively.
Both had plunged under the $40 level at the end of 2008 in the wake of the most dangerous financial crisis faced by the world since the Great Depression of the 1930s.
However, some observers point out that the real anomaly is not falling prices, but the astonishing rise that commodities recorded in recent years -- with oil prices surpassing $140 per barrel in 2008, for example.
They argue that the decline is merely a return to normalcy of pre-crisis levels.
The imminent return of Iranian oil on world markets and the supply of US shale gas will help to keep prices down, experts say.
The Islamic Republic's exports could reach a potential 2.4 million barrels per day in 2016, from 1.6 million barrels in 2014, according to data from economist Charles Robertson at investment bank Renaissance Capital.
Demand for copper, an indispensible metal for a range of industrial sectors, had risen 6% over a year.
Its current fall is linked principally to fears on China, where demand had recorded unprecedented growth over the last decade.
'Pretty sizeable gains'
That expansion had sent mining companies on a roll, with huge investments and new mines to cater to China's burgeoning and seemingly insatiable appetite. China consumes around half of the world's output of industrial metals.
Then these firms cut their costs but maintained output levels, leading to a glut in supply and lower prices.
But all this is good news for the US and European economies.
Martin Kunc, associate professor at Warwick University, said salaries in the big industrialised nations had not grown as fast in real terms as commodity prices, arguing that the phenomenon would lead to a rise in purchasing power.
Yet not all experts agree that commodities are entering a new period of lower prices amid abundant supply.
Capital Economics' Jessop argues that should demand remain low producers will cut output to support prices. That and other changing factors could improve investor attitudes towards the fortunes of commodities.
"We expect sentiment to recover, albeit slowly, over the remainder of the year, as the news from China in particular improves... The upshot is that we expect some pretty sizeable gains in the prices of most industrial commodities over the coming months," he said.