EFIC puts spotlight on commodity markets, debt hangovers

The August issue of EFIC’s newsletter, World Risk Developments, examines developments in three areas: world commodity markets, countries with a debt hangover from the global financial crisis, and Africa.

The August issue of EFIC’s newsletter, World Risk Developments, examines developments in three areas: world commodity markets, countries with a debt hangover from the global financial crisis, and Africa.

‘A couple of factors influencing world commodity markets at the moment are the slowdown in China and drought in Russia’, says EFIC senior economist Dougal Crawford.

‘The Chinese slowdown looks to be the more powerful factor. The drought in Russia and a decision by the Kremlin to impose an export embargo, have driven world wheat prices up. But unlike during the so-called global food crisis of 2008, this time worldwide grain stocks are plentiful, so the price spike may prove short-lived.’

The development to watch more closely is China, Crawford says.

‘The major advanced economies are stuck in the doldrums, so China has become the incremental consumer of most minerals – iron ore, copper and nickel plus the world’s largest energy consumer. Yet it is slowing as the mammoth fiscal and credit stimulus that Beijing gave to the economy last year starts to fade. Already Chinese import volumes of iron ore, coal and copper are down by at least 10% from March and spot prices of coking coal and iron ore have slipped below current contract prices,’ he says.

‘So despite the wheat surge the outlook for commodity prices is softening.’

A recurrent theme through the EFIC newsletter is that the global financial crisis hasn’t just laid low US sub-prime mortgage borrowers and North Atlantic financial institutions which bought mortgage-backed derivatives.

It has hit a much wider range of highly-geared entities.

This month, the newsletter looks at three of these: Russia, Vietnam and Dubai. All are struggling in various ways to make ends meet in their budgets and to restore their reputations with creditors and ratings agencies.

The third area of the newsletter looks into is Africa, two areas in particular: West Africa and Kenya.

Australian mining companies are showing renewed interest in developing rich iron ore deposits in West Africa, the newsletter notes, but political risks and infrastructure challenges will constrain progress.

In Kenya, a new constitution holds out the promise of diffusing ethnic tensions that erupted into violence after a contested election in 2007. But it has also challenged the interests of some groups, and they could react violently especially at elections scheduled for 2012.