The economic region close to Perth is particularly exposed and there is deteriorating evidence that there is not remotely any sign of stabilisation or recovery in commodity prices looking forward.
Indeed, with the confluence of weakening Chinese demand and peak supply from prior development, this would suggest that the current pricing environment is here to stay for quite some time. The last commodity price slump lasted for well over a decade from the 1980s to the late 1990s, and is often quoted by supporters of the super-cycle theory who believe it is inevitable due to the lead time and inelasticity of supply.
Similar characteristics can be seen for Brazil, Chile, Venezuela and Nigeria which have significant reliance on the oil price and commodities. Their economies and currencies are being devastated at the moment and again, it is difficult to see any improvement on the horizon.
As for the oil price, the next OPEC meeting on 4th December in Vienna will reveal whether there is any change in their strategy of market share preservation in light of the threat from fracking. We very much doubt this and Mr Putin’s recent moves in Syria are likely to remove any pressure from the West to reduce supply as they will want to exert maximum economic pain on Russia.
If we observe other high export countries such as Malaysia and Thailand, which export over 75% of their GDP but are not resource intensive, then the inevitable reliance on China becomes apparent. 12% of Malaysian exports go to China, but Singapore and Japan are also important trading partners.
The numbers are similar in Thailand and Taiwan but much of this is interdependent and subject to the location of the end consumer. It is a complex picture but collectively will be significantly impacted.
It is often said in the West that when the US sneezes, the rest of the world catches a cold. We have no idea what the impact will be now that China appears to be similarly afflicted. However, what we can say is that Chinese growth has been at the heart of the growth story in certain economic sectors and without that, the rest of the world will have to grow strongly to take up the slack. This looks unlikely in supply-led emerging economies which leaves the developing nations.
There is perhaps a silver lining to this which harks back to the last commodity pricing slump. That period, as previously referred, did coincide with strong economic growth in the West and equally buoyant equity markets driven by those sectors which were primary beneficiaries of lower input prices. We are already feeling the benefits of stronger consumer spending with the falling oil price but are yet to see this translate into expanded profits from companies due to hedging activities.
There will be some major beneficiaries going forward and also some major casualties. Whatever the area of operation, the current environment of economic cost and pricing adjustment is likely to stay for the foreseeable future and become the new normal for some time as the Chinese growth bubble deflates.