One of the main narratives of the current global economic slowdown centres around how far commodity prices have fallen. U.S. crude was up around $110 (U.S.) per barrel, but is now back to $80. Copper was up to $4.60 per pound in February, and fell to $3.10 this month.
No doubt, the declines are sharp. That’s about a 28 per cent decline for oil, and around a 33 per cent drop for copper. But while those numbers sounds staggering on their own, they actually aren’t that shocking when put in a larger context.
When copper ran up earlier this year, the world economy was engulfed in a massive commodity supercycle, so you could argue that its value was grossly inflated. The same is true for oil, though to a lesser extent. While both commodities have come off since, their current value actually isn’t that low - not if you remember that global equity markets are already factoring in a recession in Europe and extremely weak U.S. economic performance for the next two years. $80 oil is not the $35 oil we saw in March 2009.
There will be some who say that the economic downturn is only just getting started. They have a good point. And at this point, no one knows what will transpire. But what happens if the opposite transpires? Imagine there’s a slight recession and prices hover around these levels, and then the economy picks back up. If these are the base commodity prices, everyone is going to pay for it.
Oil, of course, fuels the global economy, and copper is often referred to as “Dr. Copper,” with its PhD in economics. In other words, it can forecast what’s happening with the economy because it’s used as a source material in so much of what we use on a daily basis.
In other words, if copper doesn’t fall much farther, corporate input costs could skyrocket during the next recovery.