22 November 2023
Equity markets around the globe have bled after yet another supersized 75bps rate hike by the Fed, bringing the current US federal funds rate target up to 3%-3.25%, the highest since 2008, and blowing out 2023 projections to 4.6%.
The S&P 500 closed out Monday night’s trading session -6.28% lower than the previous Monday and -24.15% lower than its January all-time high. All eyes are on the June low for 2022, with the index just another 0.5% away from breaking it.
The S&P/ASX 200 finished Tuesday’s trading session -4.56% lower than the previous Tuesday, and is -14.89% lower than its all-time high in August 2021.
Resources account for over 70% of Australian exports, and mining represents 11.5% of GDP. It is a stark reminder that it took 11.5 years for the S&P/ASX 200 to recover and reach its resources driven pre-GFC peak, but it took the S&P 500 just five years.
Just a few months ago, a decade-long underinvestment in supply was driving a commodity supercycle. Now, the Bloomberg Commodity Spot Index, which tracks futures contracts of all major commodities from copper to oil and wheat, is down over 22% from its June peak on recession fears.
Usually considered an economic bellwether, copper demand has been driven out of China, which accounts for over 50% of demand. The energy crisis in Europe, which accounts for 15%-20% of demand, threatens to reduce demand to the extent of a price crushing inventory surplus.
Citi analyst Max Layton, who in February this year was forecasting a $US9,500/t copper price for Q1CY23, is now forecasting $US6,600/t for the same period because of the gas crunch. Macquarie has put forward a 691kt surplus for 2023, up from a 162kt deficit in 2022.
Global all-in sustaining costs of copper production rose 16.2% year-on-year in 2021 to $US2.12/lb, before the war in Ukraine and oil and gas fundamental undersupply really started to reveal themselves. With copper hovering around $US3.30/lb, and natural gas still trading 83.85% higher than it was at the start of the year, there is not much room to move.
Signs of energy-induced commodity market dysfunction are popping up in other resources, with the energy cost of producing one ton of aluminum in France estimated at $US8,000, but all the aluminum spot and futures contracts on the LME trading at less than $US2,500.
Past performance is not a reliable indicator of future performance.
- cnbc.com, Fed raises rates by another three-quarters of a percentage point, pledges more hikes to fight inflation
- rba.gov.au, Education
- afr.com, The ASX’s long, long road to recovery
- mining.com, Commodities gauge falls to lowest in 8 months on recession fears
- mining.com, Europe’s energy crisis to drop copper price to two-year low
- mining.com, Europe’s top copper producer looks to cut gas usage in Germany
- spglobal.com, Copper all-in sustaining cost jumps 16.2% YOY in 2021, margins double