Slowing growth in developing countries has started to affect the commodities market, especially for coal, as orders are slashed and prices have fallen as much as 10 percent in a month. Commodities are often closely linked to the success of developing economies, whose demand for energy increases as wealth increases and infrastructure is improved.
Charlie Morris, the head of absolute return at HSBC Global Asset Management, explained to Reuters that “commodity demand is more concentrated in fast-growing countries ... The marginal buyer of commodities is very much the emerging world and it's going through a bear market right now. Commodities will probably have a bad time for much of this year.”
Thermal coal, as the cheapest fuel for electricity generation, is vital for the industrialisation of emerging economies, and has therefore been the hardest hit by the recent slowdown in growth. Currencies, such as the Indian rupee and the Turkish lira, have also fallen, making coal imports much more expensive.
South African coal producers have been badly affected by the weakening of demand from India, forcing coal prices in the region down 8% in the last 10 days. George Cheveley, a portfolio manager at Investec Asset Management, warned that “people might see India cutting back on coal purchases and thermal coal prices might come down further.”
Reuters adds that European coal markets have also suffered, with prices falling more than 6% over the past two weeks thanks to a reduction in demand from Turkey, and Australian coal prices are down 10% since the start of the year, currently at $78.75 per tonne.
Other commodities, such as iron ore, have also been hit by the fall in demand from struggling developing economies, however Reuters notes that this is more closely linked to the situation in China than other developing countries.
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Colin Hamilton, the head of commodities research at Australian bank Macquarie, stated that “iron ore is purely a China story whereas coal is more leveraged on emerging markets, particularly India.”
Last year Chinese coal consumption rose just 2.6%, one of the lowest rates of growth for years. This was fuelled by a slowdown in the country’s economic growth, along with new environmental policies that promote the use of natural gas in favour of coal.
By. Charles Kennedy of Oilprice.com
Charles is a writer for Oilprice.com