Commodities prices have fallen sharply over the last one year on China growth slowdown and its contagion effect on commodity exporting economies. Crude oil, silver and gold prices have fallen by 48%, 14% and 7% respectively. The Thompson Reuters/Jefferies CRB Index (CRB Index), a commodity index that tracks a basket of 19 commodities that are traded globally has fallen 31% in the last one year.
China GDP growth is down from over double digit levels to levels of 7% over the last eight years. China is fighting over lending, asset price bubbles, pollution, lack of economic and financial sector reforms and corruption leading to a slowdown in growth. China is the largest consumer of commodities in the world and given its falling growth prospects, commodity demand has come off leading to a sharp fall in commodity prices.
Given the falling commodity demand and prices, commodity driven economies are feeling the heat. Brazil’s credit rating has been downgraded to BB-, which is junk category. by S&P rating agency. Russian economy is into recession.
Glencore plc, the Switzerland based company, is a commodity producer, processor and trader. The company markets and distributes commodities to the industrial, automotive, construction, steel, power generation, oil and food processing industries. It is large company with presence in more than 50 countries. In 2014 its revenue was USD 221 billion, 59% of revenues constitutes energy products, 29% metals and mining and remaining agricultural products. Glencore is hit hard by the current commodity slowdown. In the last one year its stock price has fallen 78%.In the last 2 months 2/3rd Glencore market cap wiped out.It has net debt of USD 29.5 billion as of June 2015. Five year CDS spread i.e. annual cost to insure bond holders of Glencore against default is 791bps as of September 2015. The spread has surged 4 times in the last 2 months. In July it was around 200bps.
Indian commodity companies are seeing stress on equity and debt
India’s largest commodity companies, Vedanta and Hindalco are also suffering from commodity price fall. Their stock prices have fallen sharply and credit spreads have gone up sharply. Bonds of Vedanta and Hindalco, maturing in the years 2019 and 2022 respectively have seen credit spreads move up by 136 bps and 96 bps respectively over the last one year. The outlook for such commodity companies is not very optimistic given the weakness in prices of commodities from copper to zinc to aluminium.
In the last one year Vedanta and Hindalco share prices have tanked by around 70% and 65% respectively. Tata steel also fell 61%
In the near future commodity prices can fall further on weak demand and lower inflation expectations. Major economies of US, Eurozone and Japan are struggling to reach their inflation targets, facing disinflationary pressures. Improved demand in global economy and moderate inflation expectations can take commodity prices higher.