Commodity Prices Plunge as Demand for Energy, Metal and Grain Fall

Commodity prices slumped the most in five decades as demand for energy, metals, and grains fell in the second half of 2008, due to the credit crisis. After reaching a record high on July 3, 2008, the CRB Commodity Index fell 56% during the five months ahead, fell to its lowest level since August 2002. At the same time, the level of container shipping in Asia-Europe routes fell by 75-percent.

Exactly two years ago the world's commodities and stock markets caught in the grips of a death spiral. As a revelation of extreme magnitude of subprime mortgage debt crisis began to surface, the bank began to cut off funds to companies and other borrowers, despite government and central bank efforts to unlock jammed credit markets. Global cross-border lending by banks shrunk $ 5-trillion in the last nine months of 2008, the sharpest fall ever recorded.

A global credit crisis occurs, sharply limiting the availability of credit, and trigger an economic downturn is unprecedented, and synchronization in the major economies, exacerbated by massive demand destruction.
About $ 30 trillion in market capitalization removed from the world of stock market peak in October 2007, amid the worst banking crisis since the Great Depression of the 1930s. Dow Jones Stoxx Basic Resource Index, home of Europe's largest mining company, and the DJ Stoxx Banking index, hard hitting, both lost 65 percent of their market value. In Japan, the Nikkei-225 stock index down -42% in 2008, the worst loss in 58-year history.

Shipping companies are slammed by the double whammy. Paralysis in financial markets dried availability of letters of credit to the sender, - the stifling of global trade. Baltic Dry Index, tracking the cost of shipping raw materials, dropped dramatically from an all time high of 11,793 in May 2008, to below the level of 800, 22-year low. The key linchpin demand for commodities and cruise ships, - China, cut imports to $ 51.3 billion in January 2009, or -43% less than the previous year.

During the historic crisis in world markets, copper prices, down from a record high $ 4.20 on May 5, 2008, to as low as $ 1.25 on December 26, 2008, the lowest in four years. Crude oil prices fell from an all time high of $ 147.27 on July 11, 2008, skidding in a nosedive to $ 32.40 per barrel on December 26, 2008. Wholesale unleaded gasoline futures fell 2.63 U.S. dollars / gallon. Overall, the Continuous Commodity Index (CCI) measures the same 17-commodity basket weighted, losing half its value in five months, in the second half of 2008.

But the ride to save Beijing's top commodity producers, with long-term plan of building-up the country's infrastructure, - saw a golden opportunity, to start stockpiling raw materials cheaply. On 9 November 2008, Beijing stunned the world, by launching a package of infrastructure spending and other stimulus measures are spread over the next two years, on a large scale 4-trillion yuan ($ 586 billion), equivalent to 16% of China's total economic output.

A few hours after Beijing launched a massive stimulus plan, Zhou Xiaochuan, head of the People's Bank of China (PBOC), told the head of finance for the world and central bankers gathered at the meeting-of-20 Group in Brazil, that the Shanghai money markets can expect a large increase in liquidity, lower reserve requirements for banks, and interest rates lower. "Now that inflation has been reduced greatly. And to slow down fast enough," said Zhou.

When the historic crisis of global stock and commodity markets in the second half of 2008, a fading memory. Shrug-traders from terrifying nightmares in 2008, but on the contrary, the ride height on a magic carpet ride is supported by the "Quantitative Easing '(QE. Earlier this week, copper futures hit a new all-time high $ 4.27 / pound. Other commodities joined the All-Star band-wagon - is coffee, livestock, sugar, cotton and rubber, all jumped to a record high A second string of high flyers, - crude oil, corn, iron ore, nickel, and. soybean, close behind.

Trigger a resurgence of the "Commodity Super Cycle" is the unrelenting growth in demand for commodities from developing countries, namely China and India, home to one third of the world's population. Crude oil has rebounded to $ 90 / barrel, aided by China, which increased crude oil imports by 16% in the first 11 months of this year, to 4.6 million barrels per day (bpd). China is expected to account for one third of the increase in global demand for oil in 2011, by about 500,000-barrels.

Ironically, two years after Beijing put a floor under the commodity market, the dilemma now facing one of the worst in decades, - a spiral of rising costs of raw materials, and commodity price boom, which can shrink the profit margin for the factories, and decrease the disposable income of its citizens . Continuous Commodity Index was 28% higher than last year, and its stopping exert pressure on China's inflation rate. Beijing said consumer prices 5.1% higher than last year, an economist at 28 months is high, but the person measuring the level is much higher.

Beijing has tried to derail an upward spiral in commodities, by tightening monetary policy, and hiking margin requirements on commodity exchanges. PBOC has raised the required reserve ratio of banks' (RRR) six times this year with a total of 300 basis points (BPS) to a record 19 percent. On Dec. 15, the PBOC Zhou chief warned, "We will step-up the use of a reserve requirement, which must play a role," so that further increases in China tend to RRR in early 2011.

Three RRR increased since mid-November will drain 1-trillion yuan in combined ($ 150 billion) from the banking system. But at the same time, the PBOC is to inject a large amount of yuan into foreign exchange markets, as part of an effort to rig the value of the yuan against the dollar. In November, the PBOC injected 320-billion yuan ($ 48 billion) into foreign exchange markets, after injecting 519-billion yuan in October. Thus, RRR hike to 19% of the bank as a tool widely used to sterilize the yuan's central bank injected into the FX market.

China's M2 money supply rose to a record 71 trillion yuan in November, stood 19.5% higher than the previous year, and leave its citizens tremble in fear of losing purchasing power faster. For those Chinese citizens who seek salvation for the savings they get hard, one-year deposit rate in China's major banks offered the paltry 2.50%, much smaller than the official inflation rate of 5.1%, which has persuaded the Chinese people much to keep their savings in precious metals.

PBOC's most potent weapon to control inflation is raising interest rates. In late October and early November, the PBOC is likely to move toward that, when struck China's Treasury bond yields higher. China 7-year benchmark yield rose 1% to 3.85% higher, which in turn, triggered a brief shakeout in global commodity markets. All-Star line-up of crude oil, cotton, rubber, copper, silver, and soybeans, while falling 10% to 20% lower.

But so far in December, the PBOC has refrained from soak-up the yuan through the sale of T bills or government bonds. The yield on the 7-year T-bonds China has decreased 20 basis points 3.65%. This is a sign that Beijing is not inclined to raise interest rates further, but instead, may rely on increased RRR to drain and sterilize liquidity. PBOC's anti-inflation hawk secretly handed over to the higher inflation that will become a more common feature of China's economic landscape. In other words, China's Politburo "zero tolerance" for rising prices, is succumbing to the main strength of the "Commodity Super Cycle," and the Fed QE-2 scheme.

The Fed QE-2 injection provides a high-octane fuel for the "Commodity Super Cycle" and steamrolling China's efforts to combat inflation. Soaring costs of various commodities, from cotton, copper, crude oil, iron ore, nickel, rubber, corn, rice, and soybeans, could spread to other sectors, and ultimately saddle the Chinese economy with double digit inflation rate. On Dec. 5, Fed chief Ben Bernanke argued that the U.S. central bank, responsible for China's inflation headache, and instead blamed Beijing's policy to hold tightly to the yaun / dollar peg. "Keeping China's currency is too low is bad for China, because it means China can not have independent monetary policy alone."

So far, the PBOC is to enforce the negative real interest rates, - discount for inflation, to prevent bursts of "hot money" from abroad from flocking to the Chinese yuan. On Dec 12, Beijing increases to 4% inflation target for 2011, from 3% this year, an indication of what the Politburo see as By failing to close the gap between interest rates and inflation "new normal.", China's central bank passing green light for traders to continue buying commodities, and precious metals.

Beijing caught between understanding the "rock and a hard place." Beijing that if it allows the yuan to strengthen further against the U.S. dollar, to artificially lower the cost of imported commodities, that base metals and crude oil dealers to take on the move to jack-up in commodity prices, given the purchasing power of China. There are also lingering doubts whether the PBOC rate hike could unilaterally thwart the powerful "Commodity Super Cycle," without the joint support of other major central banks, are willing to tighten their monetary policies together.

China foreign exchange reserves, the largest in the world, estimated to increase to $ 2.75-trillion in November, with about one-third of the deposit, or $ 907-billion, which was parked in the US-Treasury in October. But since the Fed began its QE-2 scheme on November 4, the value of the notes 10 years of US-T, measured in yuan, has declined almost 5 percent. Beijing holds the second largest foreign currency, the Euro, has decreased by 13% from a year ago, largely as a result of global capital flight from the Greek government bonds, Irish, and Portuguese. If Beijing holds the 10-year German Bunds, it suffered a loss of capital of 14.5% from last year, including exchange rate losses.

Commodity outlook for China's bond portfolio looks bleak for 2011. The Fed said it would continue to pump an extra $ 450-billion-dollar printed electronics into global money markets in the first half of 2011. Bank of Japan is a signal that may increase the size of the money supply, if the dollar fell further against the yen. Bank of England Charles Bean representatives have suggested that if the British economy to falter in 2011, then his own version of QE-2 could be around the corner. Thus, scored big money will continue to fuel "Commodity Super Cycle," and worked to the detriment of bondholders Asian G-7 governments.

Gold market has been tracking the growth of Chinese foreign currency deposits for several years. Bullion dealers calculated that at some point in time, Beijing will see the light, and realize that ownership of a very large fiat paper money eventually returns to its intrinsic value - zero. Perhaps, in 2011, Beijing secretly would increase the dose of precious metals, and began selling off large pieces of UK gilts, and Japan and US-government bonds. Portfolio shift may already be underway. China imported 210-tons of gold in the first 10 months of this year, increasing five-fold compared with the same period in 2009, - Xinhua reported.