Low commodities make for an ugly year for emerging markets

The past year was a terrible one for emerging economies, and this year promises to be even worse. Economic divergence between the rich and poor countries has never been greater.

Brent crude has fallen 35 per cent in the past 12 months. Above, an oilfield in Saudi Arabia’s Empty Quarter. Jamal Nasrallah / EPA
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If you live in the West, this year will bring not only the best economic growth since the financial crash, but also a welcome increase in real income for consumers created by lower commodity prices, particularly oil.

However, for the emerging economies that produce the commodities, the opposite is true. The past year was a terrible one for them, and this year promises to be even worse. Economic divergence between the rich and poor countries has never been greater.

The European economies should stage something of a recovery, according to the consensus of economic forecasters, driven by the north, notably Germany – although Britain, the EU’s No 2 economy, should still lead the way at 2.3 per cent. Not that .7 per cent economic growth across the European Union is anything to write home about – but it is better than the 1.5 per cent the Europeans managed last year and well above the levels we have seen since 2007. The US is expected to manage 2.5 per cent, its sixth year of growth, but that is still well below where it should be at this point in the cycle.

So who gets the real benefit of the commodity price crash? A year ago the price of a barrel of Brent crude was $55 and two years ago it was more than $100. In the New Year it lipped below $36, a fall of 35 per cent in 12 months. Other commodities have suffered as badly – copper fell by 25 per cent, nickel by 41 per cent and platinum by 27 per cent. Iron ore has been the poorestperformer, down from a peak of US$190 a tonne to under $40, while grain, sugar and just about everything else have fallen to levels not seen in years. The price of coal has collapsed, and even diamonds, hardly a basic commodity, are experiencing their biggest glut on record.

Past oil crises and soaring energy costs have resulted in severe world recessions, the most notable being 1974, when oil quadrupled after the year’s Arab-Israeli war. But oddly enough the corollary is not true, and although the consensus forecast for world growth this year is for 2.8 per cent against 2.5 per cent last year, that is not much of a boom. Emerging markets, notably Brazil and Russia, are in recession and South Africa teeters on the brink, largely through self-inflicted wounds. Far from boosting growth, the commodity crash has raised major doubts about even the biggest economies, and no one would suggest that the United States, China or Japan have started the year with any great confidence.

Brazil was supposed to be in the vanguard of fast growing emerging economies – and for a while it was. But not anymore. Last year the economy declined by 3.5 per cent and it may do even worse this year, making it the worst performer of any of the Brics countries – worse even than Russia or South Africa. The real has collapsed, government bonds are close to junk status and the stock market, in dollar terms, fell by 40 per cent last year, twice as bad as South Africa, where the currency is down by 25 per cent and the markets by 23 per cent in just 12 months.

Sub-Saharan African, with the poorest economies in the world, has perhaps been hit hardest. The value of the kwacha in Zambia, highly dependent on copper, has halved after the country rejected the IMF’s offer to step in. Mozambique, where a few years ago ships queued for weeks to get into clogged ports to take its huge coal reserves to China, has fallen apart, and the IMF is waiting to step in. Zimbabwe is a basket case, and the glut of diamonds has hit the Botswana economy hard. The oil producers Nigeria and Angola have suffered too, calling into question the whole doctrine, so fashionable a few years ago, of Africa Rising. It is not rising any more.

Among the much-vaunted Brics countries, which were going to provide the new engine of global growth, only India is still powering ahead, the one bright spot in an otherwise uncertain and bleak picture.

Shipping rates have taken their worst beating in years – in August last year a Capesize bulk carrier, which cost $13,000 a day to operate, could be chartered out at $20,000 a day. By the end of the year that had slipped to below $5,000.

Commodity stocks have fared almost as badly. Anglo American, which at the dawn of democracy in South Africa in 1994 accounted for 44 per cent of the Johannesburg Stock Exchange, fell by 70 per cent in 2014, attracting the headline in the Financial Times: Can Anglo survive?

Anglo, which paid the (very lucky) Oppenheimer family $5 billion in cash for their stake in De Beers in 2011, today has a market value of $6bn compared to $50bn five years ago. Who ever thought we would see that?

I don’t think the sense of foreboding in global markets has ever been greater. No single economist foresaw the scale of the collapse in the oil and commodity prices last year. The general view is that they all have further to fall. But could we be about to see the bottom? A late recovery in Anglo American and other shares over the New Year suggests that someone thinks so. There are still some brave – or foolish – souls about.

Ivan Fallon is a former business editor of The Sunday Times and the author of Black Horse Ride: The Inside Story of Lloyds and the Financial Crisis.


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