Does the recent commodity price rout benefit Asia? and will this a likely trend going forward?
The recent commodity price plunge occurred during the month of April 2013 has resulted in various impacts on other financial markets, including equity, fixed income, the alternative investment industry, etc. It has also brought about a relief among many consumers and businesses from countries which have a sizeable trade balance that consists of commodity product imports, including Singapore, Hong Kong, China, Japan, among others, but it also brought about some negative impacts on commodity producing countries, including Malaysia and Indonesia, where both countries are robust commodity exporting economies, for example, crude palm oil.
The first sign of a massive plunge in commodity prices took place on April 12, 2013, when the Central Bank in Cyprus was reported to have sold off massive holdings of their gold reserves in order to fund the necessary capital requirements needed to fulfil the requirements for a bailout package from the various international agencies, including the International Monetary Fund, and the European Union (EU). By the next trading day, several commodity prices took the direction of a fall in the gold prices. According to Bloomberg.com, the price of gold fell approximately 15.0 percent to USD 1,431.95 year to date (YTD) in a single day, and it has officially entered into a bear market on April 12. Investment bank, Goldman Sachs Group Inc. is putting a forecast of USD 1,390.00 by year’s end, which could signal a possible long-term decline in other commodity prices.
With the sudden slump in commodity prices across the board, it has brought quite a relief for many including frequent air travellers who are enjoying lower airfare prices as a result of the follow-on declines in crude oil prices. The recent price range for Brent Crude grade oil is hovering around USD 100.00 to USD 102.00 per barrel comes as a relief for many airlines, including the budget airline companies, where the price of jet fuel, and the hedging costs associated with the price, is one of the biggest ticket item in their capital structures.
Although the plunge commodity prices has resulted in lower operating costs for many businesses, some businesses, including some of the fast-food giants, such as Yum! Brands, where most of their worldwide operations’ exposure are tied to China since the last decade. Readers might be aware that China is currently facing an outbreak of the avian flu epidemic, which has since wiped out several of their poultry supplies, and resulted in a majority of the Chinese population falling ill, or are in danger of losing their lives. With a large Chinese population falling ill, and the inherent fear of getting into contact with live poultry, this has resulted in loss of profits, especially for businesses such as Yum! Brands. In fact, in a most recent 1Q13 earnings release, the management of Yum! Brands has gave a gloomy outlook for their earnings in FY 2013 due to the severe loss of profits as a result with the ongoing avian flu epidemic, and Chinese consumers shunning away from fast-food outlets such as KFC®, which is one of the brands owned by Yum! Brands. In this case, the fall in commodity prices has not really been felt by businesses, such as Yum Brands!
Asian countries with commodity export-focused economies are at risk of falling into massive trade deficits. For example, in Australia, where commodities comprise a majority of their exports balance, the recent commodity price plunge has resulted in a sudden shift in their once booming natural resource-focused economy. On Tuesday, April 23, 2013, Finance Minister, Wayne Swan, was quoted by the press as saying that Australia might have to face decades-long budget deficits going forward. This is quite a significant change intone from what was described a year earlier by the Minister that Australia is going to finally eliminate its federal deficit which has been an electoral issue for many years, thanks in part to the robust commodity exports. Mining companies such as Rio Tinto, among others have given somewhat of a downbeat forecast for their earnings as a result of the April 2013 across-the-board commodity price plunge. Several Australian households might have to cope with massive budget constraints, potential decline in property values, and job losses as a result of the commodity price plunge, as many Australians have been known to work or have an indirect association with the commodity sector, ranging from employment in the farm, and mining sectors, to ancillary businesses that support the mining infrastructure in the country. The issue is exacerbated by the continued strength of the Aussie Dollar, which does not bode well in an economy that is reliant on commodity exports for the last decade or so.
Overall, the immediate impact of the commodity prices during the course of a week in April 2013 might have brought some short term relief at the gasoline stations, markets, businesses that focused on retail customers, however, in the long-term it continues to have mixed effects across many Asian and Pacific countries, such as the case of Australia. There are still questions being tied to the overall effectiveness of the flooding of liquidity by many several central banks across the world, including Asia, such as Japan. Questions remain as to whether the long-term impact from a commodity price plunge could bring about continued prosperity in the region, and whether the monetary stimulus will ultimately result in more harm than good for many Asians, especially those living on the poverty lines.