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2015 In Review
The Winners and Losers of the Commodities Collapse

The story of 2015 can be told a few ways, but one of the most obvious ones is that this was the year the commodities boom officially came crashing down. Raw materials prices have been falling for a few years now, but in 2015, the bottom completely fell out as demand from manufacturing giants—particularly China—slowed. From South Africa to Brazil, the results haven’t been pretty.

Yet it’s important to remember that commodity prices are cyclical. When prices drop, producers stop investing in new capacity. At some point, demand will catch up to supply once again and commodity prices will lurch back up.

These cycles are as old as the modern capitalist economy (going back to the first Dutch tulip bubble), but they still take people by surprise. They also confuse geopolitical analysts. Practically the whole profession mistook the last “up” cycle as a fundamental transformation of the world order. Commodity exporters like Russia, Brazil, and South Africa were seen as emerging new powerhouses—but now their economies are looking more like roadkill.

The effects of the cycle are very real and they mean trouble for commodity producing countries that are under any kind of stress. That’s a long list, and some of these countries could experience serious instability — especially in places like Venezuela, where some of the world’s dumbest economic policies were causing trouble even when oil prices were high.

On the other hand, the down cycle is good for China, a country that mostly imports commodities and exports manufactured goods. Oil, iron, steel, tin, copper, and just about everything else China’s factories need is on sale right now. That’s very helpful when China’s profit-strapped manufacturing economy needs every dime it can get.

For the United States, it’s a wash. America produces a lot of oil, gas, minerals, and agricultural goods, but we produce plenty of other things. Low oil prices are bad for Texas, but good for Detroit. When gas is cheap, people tend to buy big honking cars that earn more profits for the car makers. Some sectors of the financial markets have been looking shaky; junk bonds issued by companies in the oil and gas business aren’t looking quite as safe as investors once thought they were. But on the whole, the U.S. is hedged better than most developed countries against high commodity prices—and hedged better than developing countries against commodity crashes. That’s one reason that the U.S. consistently remains one of the world’s top economic performers.

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  • Andrew Allison

    You’re right, of course, about Extraordinary Popular Delusions (Makay’s 1932 book of that title is well worth reading) but not quite right about China, which has enormous overcapacity in many processed commodities, notably steel) and is being forced to export them at fire-sale prices to keep the factory doors open. It’s the same problem faced by OPEC, et al.

    • Jacksonian_Libertarian

      I agree, China has been bootstrapped and uplifted about as far as it can be, and with 1/2 their economy owned by the Government Monopoly, and thereby completely insulated from the “Feedback of Competition”, we are not going to see China taking the next step to a 1st world economy. Despite foreign investment since Nixon, Kissinger, and Deng Xiaoping, China hasn’t developed a single world recognized brand name, like Toyota, Sony, Samsung, Kia, Google, Microsoft, Intel, Apple, etc… We all know the competence level of the Chinese Government Monopoly, it was all there in China’s water buffalo level economy before the arrival of the foreign investors. And the massive drain of foreign capital leaving China now, tells us those investors are desperate to get their investments out of China. China has hit the wall, and it is all downhill from here. Forget double digit growth rates, China will be lucky to keep a GDP half of what it is now. Don’t listen to the Government lies, look at the amount of electricity generated, and gasoline being used, energy consumption is the True measure of a technological modern economy.

      • Jim__L

        Lenovo and Huawei are known in Silicon Valley. Alibaba is Chinese as well.

        Also, Chinese companies are positioned well to siphon business off of American internet brands like eBay and Google — the cut they take out of every transaction (point-to-point sale or advertisement) is significantly smaller than the American equivalent. We could counter that easily of course, but it would suck a lot of the oxygen out of some of our powerhouses.

        I’m not saying you’re wrong about the trends, however. I haven’t looked at the energy consumption figures. Could you link some?

  • Anthony

    While for both information purposes and economic review for 2015 commodity winners and losers have content value, here’s a point of considerable importance to consumers of world economic characteristics/conditions: “…emerging economies have become dangerously dependent on low interest rates and high commodity prices. That is, many emerging-market companies are in the highly vulnerable position of having borrowed heavily in foreign currencies. Therefore if capital flight occurs, the consequences will be dire – tightened credit, balance-of-credit difficulties, inflation, rising interest rates, fiscal stress, and downgrades by major credit-rating agencies (all which implies more capital flight).”

    In short, yes, the U.S. remains a top performer by certain metrics and economic cycles are a fact of market economy but global (world) market (economy) yet impacts/effects. We market watchers operate in a small world and remembering such helps to inform.

  • Anthony

    “Every age produces its own brand of Oligarchs – feudal lords, banking gnomes, captains, of industry. Our age has its own incipient ruling class, the tech oligarchs.”

    Something for the discerning eye and definitely related going forward: http://www.newgeography.com/content/005127-the-new-masters-universe

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