Are commodities set for a crash

The IMF has dire warnings this week about the ever encroaching costs of commodities. This week oil fell back to its lowest point for 3 months. The market is now starting to fret and ask when the next drop will come – not if, and in the same breath they ask will it be a rapid fall.

This article from BN seems to quite fairly outline the situation at the moment.

This time last year, Katrina was making the headlines. We were in the midst of the US hurricane season, and oil was hitting new highs. Since then, the black stuff just kept on going up, until it finally peaked at $78 in July. Analysts warned it could break through the $100 ceiling, and economists argued over whether the price changes were inflationary, or in fact deflationary because the high price of oil had the effect of dampening demand, just like a rise in the rate of interest would.

But here we are, in the middle of the US hurricane season, and as of yet, not a single hurricane has made a headline. According to hurricane researchers at Colorado State University, there are likely to be 13 named storms this year, compared to 28 last.

Combine the quietness on the wind front with the relative peace in the Middle East at the moment and oil jitters have eased. This morning when we took our daily reading from the new York Mercantile Exchange, we were able to record the lowest price of oil since the beginning of April.

Meanwhile, the IMF has warned that the boom in metal commodities could end in tears. Metals such as copper and aluminium have soared 180 percent since 2002. It’s led to a furore of activity in the mergers and acquisitions market, as the big mining companies tried to exploit the opportunity to its full. Meanwhile, mineral rich countries such as nations in Africa, Australia, South America, The Middle East and Canada have done very nicely out of the surging prices.

But yesterday, the IMF warned that prices will probably fall back dramatically by 2010 or 2011, with copper expected to fall by 57 percent, and aluminium by 35 percent. (more…)

Of course in the meantime compnaies like BHP Billiton go from strength to strength.

Our concern is for the economies that have become too dependant on digging or drilling stuff from the ground. Of course Russia and the Arabic countries have benefitted vastly from the wealth, but this has mostly been shielded from the citizens. However, in countries like Australia where the ‘wealth effect’ has been shared around may feel the impact once the money stops coming in. Similarly, China and Japan will benefit from the lowering of raw materials and energy costs.