Commodity Slump May Have a Silver Lining

By Investments
Commodity Slump May Have a Silver Lining

Metal and mineral commodities are one of the few sectors not to have been affected by the global slowdown because China helped fuel massive demand.

But now China’s own growth is slowing from double-digit GDP figures and with it the prices for commodities are being forced downwards too – except for silver that is riding the storm.

So far, countries with high levels of metal and mineral resources, such as Australia, have managed to avoid the worst of the slowdown.

While the booming prices for the commodities created large numbers of wealthy – and super-wealthy – people, now there are worries that the long running up-cycle is coming to an end with commodity prices slumping.

Investors are concerned that China’s dropping demand for resources will have a huge knock-on effect for the markets and this is compounded by the major mining companies delaying or cancelling projects.

Sales drop, but price rises

The fall in prices will also affect the wealth of fortunes based on such commodities – such as the Australian billionaire Gina Rinehart.

However, not all commodities are struggling. There is still strong demand for silver and China is the largest consumer.

Demand from Chinese industry for silver may have dropped to around 1,000 metric tons for use in jewellery and coins, photography, solar panel production and in electrical appliances, but prices are increasing.

The Shanghai White Platinum and Silver Exchange says there was a drop in volume sales of 30% for silver but prices have increased by around 19% as investors look for ways to hedge against inflation.

Other than the trade in silver, most net commodity exporters are exposed to drops in prices.

Winners and losers

The problem with most commodities is that there are high fixed costs involved in getting the commodity out of the ground.

So any change in the trading price will have a disproportionate effect on the bottom line which means that for the super-wealthy their fortunes will not grow as quickly as they have done and could potentially, for some, damage their position in rich lists. Analysts say the countries most at risk from a drop in commodity prices and its wealthy investors work are Russia, Australia, Canada and Saudi Arabia.

But there are real opportunities for net commodity importers who would be boosted from lower prices for processing or consuming those commodities.

That would lead to countries such as Japan, Korea and the US benefiting.

China would also benefit as a net importer of fuels and metals but not to the extent that it would lead to a boom which would return the market to its previous heady levels.

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