|
Commodity market caves
|
 |
December 2, 1998: 12:54 p.m. ET
Trade imbalance keeps CRB index near 21-year low; more declines expected
|
NEW YORK (CNNfn) - Commodity prices continued to hover around their 21-year lows Wednesday, weighed down by emerging-market pressures and a broad imbalance of supply and demand.
Analysts say the downturn in agricultural and industrial product prices is indicative of the ongoing malaise plaguing emerging market economies and the low growth, low inflation environment at home, the same factors that have triggered a flight to quality in the domestic bond market.
Moreover, they say, it may be "just a matter of time" before prices on the commodities board slip further.
"The whole commodities board is depressed," said William O'Neill, a senior futures strategist with Merrill Lynch. "The industrials side of commodities has a clearly weaker tone than [agricultural commodities]. Not that agricultural commodities are any ball of fire."
On the industrial side, O'Neill said, aluminum, crude oil, copper and other basic metals have taken a heavy hit.
Bargain basement prices, he added, "reflect ongoing weakness in Asia and emerging markets, but also recently, the evidence of [an economic] slowdown in the United States and Europe."
For much of the year, strong demand for base metals has helped slow the decline of the broader commodity market. But going into 1999, O'Neill said, "you have to definitely question the demand prospects for industrial commodities. That likely will lead to lower [price] levels."
The CRB index, the broadest measure of commodity price activity, is down 0.40 Wednesday at 196.43, after tying its 21-year low of 195.18 Monday.
"The key factor in the first half of 1999 will be sluggish demand for industrial commodities," O'Neill said. "That will keep markets under wraps and make rallies short-lived."
Industry executives, grappling with heightened competition and shrinking profit margins, blame Asia, Russia and Brazil for much of the trade imbalance. Those countries, they say, are attempting to "export their way out of recession" by selling their commodities on the open market for extremely low prices.
Empowered by a strong U.S. dollar, American consumers are buying up imports and leaving U.S. manufacturers scrambling to downsize to survive.
According to the National Association of Purchasing Management, the domestic manufacturing sector has contracted for five consecutive months, with the purchasing managers' index falling below the all-important 50 percent level, a quantifiable sign that the trade imbalance is beginning to tip the scales.
An index number above 50 percent generally indicates the economy is expanding, while anything below that level points to contraction.
Of oil and steel
In the oil sector, prices dipped to their lowest level in more than 12 years Monday after the Organization of Petroleum Exporting Countries' (OPEC) failed to agree on a deal to soak up a global glut.
The steel industry hasn't fared any better.
Twelve of the nation's largest steel companies, accusing emerging-market countries of "dumping" low-priced steel in the United States market, are asking Washington for regulatory relief from what they call "illegal and predatory trade" of steel imports.
As they struggle to weather the industry storm, many have shut down plants and laid off employees. Some of the smaller producers have filed for bankruptcy.
But Gary Thayer, senior economist at A.G. Edwards, said plunging commodity prices are hardly unique.
"This is reminiscent of the type of concerns that existed in the mid-1980s, when we also had a big trade deficit," he said. "Although this is a big issue right now, as it was then, it's important to keep in mind that it didn't cause a recession in the mid-1980s. It just caused slower growth generally."
American consumers, in fact, "actually benefited from lower prices."
If they kept their jobs, that is.
"We still have a very weak world economy, despite the fact that the U.S. economy is still doing pretty good," Thayer said. "We're seeing lower prices basically because there is more production out there than demand." 
-- by staff writer Shelly K. Schwartz
|
|
|
|
|
 |
|
