Commodity slump could be first sign of global slowdown

Recent drops in commodity prices have turned on a yellow sign of the risk of a global slowdown, with investors increasingly aware of the symptoms of a global crisis and not even ruling out a recession.

Soybean futures prices have been trading below $15, close to early-year levels and about 18% below their June peak. Iron ore is well below the level it was at before the start of the Ukrainian War on February 20.

Corn futures prices, meanwhile, fell to US$5.88 a bushel (the equivalent of 27.2 kg), the lowest level in six months, after the weekly report by the USDA (United States Department of Agriculture ) pointed to stability in the North American crop.

The performance of iron ore reflects the more pessimistic outlook for the Chinese economy in the coming months. In the second half of the year, the country’s GDP (Gross Domestic Product) showed a strong deceleration, with an increase of only 0.4% compared to a year earlier – below expectations for growth of 1%, according to the Reuters agency, and coming of 4.8% in the first quarter.

Analysts do not expect a speedy recovery, even if most restrictions have been lifted. With the “Covid Zero” policy maintained by the Chinese government and the worsening of global economic prospects, the country’s real estate market has fallen, which affects the performance of commodities linked to construction. Metals have dropped 10% to 40% since May.

“On the one hand, we have a scenario of deceleration in the world economy, which is mainly observed in mineral and metallic commodities, which accompany the growth of civil construction in important countries, such as China. The behavior of copper also always helps to point to a slowdown and this is also reflected in the oil market”, says Felippe Serigati, from FGV (Fundação Getulio Vargas).

He recalls that a more timid world growth means a lower demand for oil. “Nobody is talking about oil going back to $70 a barrel, but it could go below $100, when previous estimates pointed to something above $130. When put into perspective, the world that is running out of steam and demand fewer commodities.”

According to investment analysis website Tranding Economics, Brent crude has regained ground in recent days near the $107 a barrel level, amid a weaker dollar and lingering supply concerns.

“In the short term, supply gaps are unlikely to be filled by extra OPEC+ production [cartel dos países produtores]. A ‘lid’ on prices remains, while worries about a recession mount, driven by aggressive rate hikes around the world.”

He points out that the global economy has faced high inflation at least since the beginning of the pandemic. The governments’ initial hypothesis, that the rise in prices would be pressured for a short time, proved to be wrong and, to control inflation, the main instrument is to raise the interest rate.

“The world grows less, interest rates are rising. Investors stop and think: what am I doing investing in commodities and emerging economies? With higher interest rates, I will invest in government bonds in the United States”, says Serigati.

A Bank of America survey, published last Tuesday (19), pointed out that investors are more pessimistic about Brazilian assets, citing external factors as the main risks, but also concerned about the country’s fiscal scenario and attentive to the presidential election.

Meanwhile, after US inflation renewed the highest in four decades, markets began to bet that the Fed (Federal Reserve, the US central bank) will promote an even more aggressive rate hike than expected.

In a recent report, The Economist magazine pointed out that rising interest rates have cooled the real estate market, weakened demand for copper and wood and reduced consumption of goods – from appliances to automobiles – and this also harms the zinc and aluminum market.

After the war and the effects of the conflict on fertilizer prices, the agricultural commodity market entered a moment of transition. “We left a critical supply scenario for a pessimistic demand reading”, says Leonardo Alencar, from XP.

“None of the scenarios is 100% true, we are in a dynamic where food production needs to continue growing, and Brazil is important in this.”

He points out that this volatility could be negative for the future, limiting production growth by worsening margins. “It’s a worrying scenario that could affect the coming years.”

Victor Nehmi, founder of Sparta and commodities manager, considers that the expectation of a slowdown so far has not translated into a recession. “There is a buzz, because commodities had gone up a lot, but for now the stocks of grain and oil are low in the world, also because of the sanctions imposed on Russia”, he says.

“Brazilian producers end up worrying less about a sudden drop in prices due to a question of supply. Even if Ukraine returns to exporting grains, this return will take time to happen. The factor that still worries and that can lead to a shortage of grains is the lowest supply of fertilizers on the market”, he adds.

“The market was already preparing for an asset price correction. He already expected that the oil and iron ore peaks would not continue in the future. In the case of agricultural commodities, this correction movement was also already priced in, and we see producers worried about how this global slowdown will take place”, says Felipe Paletta, partner and analyst at Monett.

“Inflation in the United States and the possibility of recession are worrying, although China has the ability to revitalize the economy, as it depends on a global scenario. “, he adds.

Despite the still nebulous scenario, Serigatti, from FGV, says that the agricultural commodities market should show resilience in the coming months. “The world is keeping an eye on Brazil’s grains, we still haven’t bought all the production inputs and there is plenty of room to maintain prices.”