The coming commodities bust (and who stands to win)

December 14, 2011, 10:21 PM UTC

How much for a barrel?

Asia’s top-performing economies have suffered in recent months as a slowdown in Europe and stalled growth in the United States hobbled key export markets. But there may be one silver-lining to Asia’s hardship: prices for key commodities like oil and copper are likely to decline in coming months, helping the bottom line at many U.S. companies.

When the World Bank released its latest projection for the Asian economy late last month, it said that growth in China is expected to decline to 9.1% this year, down from 10.6% in 2010. Growth is expected to continue to fall, reaching 8.4% in 2012 and stay at that level for the next several years, the bank said.

“Because China has such a high demand for raw materials, when exports from China decline, that will be good news for U.S. companies,” says Lei Chen, an economist at Wuhan University. “The growth rate in China is slowing down and that means we will be importing less commodities like oil, copper and iron ore. Prices will continue to come down.”

By how much is still up for debate. Michael Lynch, president of Strategic Energy and Economic Research, a Winchester, Mass.-based petroleum research firm, predicts the price of crude oil could fall by about 20% by next summer, bring the price of a barrel of oil down to around $85 on world markets and $75 for WTI crude in the U.S. It’s now at $96.

“What we’re seeing is a change in the supply situation, with Brazilian oil coming up, shale oil in the U.S. growing and Iraq and Libya looking very positive,” Lynch says. “Combined with the bearish demand outlook from Asia, that is going to leave the market on the weak side.”

Oil roars back to $100, but does anybody care?

Not only will U.S. firms benefits from lower energy costs, Lynch says, but consumers will have more cash in their pockets thanks to lower gas prices, benefitting retailers across the country.

As an example of how much commodity prices affect profits at big U.S. companies, Ford Motor (F) reported in October that pre-tax operating profit was reduced by $350 million in the third quarter because of adjustments to commodity hedges for future periods. The hedges would have protected Ford if commodity prices went up; instead they went down. But the company should benefit in future quarters from the cheaper commodity prices prevailing now.

Copper is another area where a slowdown in China will help U.S. manufacturing firms. Copper prices are down 28% so far this year, falling dramatically in the last couple of months. The metal reached a high of $10,190 a ton in December 2010 and fell to $6,600 in October, from where it has rebounded marginally.

“China accounts for over 40% of global copper demand and a substantial proportion of other base metals as well,” says Peter Buchanan, a commodities analyst at CIBC World markets in Toronto. “In the next year or two I think there is probably more downside risk than upside.”

Buchanan notes that a fall in metals prices “would certainly help the earnings of a large number of companies directly.” China is an important part of the equation, but so is what happens in the European economy, Buchanan says.

2012 forecast for the economy: Cautiously optimistic

Nikos Kavalis, a commodity analyst at Royal Bank of Scotland in London, says he believes the selloff in metals was more about speculators selling commodities rather than a fundamental issue of supply and demand.

He says that manufacturers that use copper such as cable and wire makers were struggling to survive earlier in the year. ‘Without a doubt, copper-intensive industries have it much better right now,” Kavalis says.

He warns, however, that he is expecting a rebound in copper prices in 2012 as the supply situation tightens. “We’re expecting a soft landing in China,” he says.

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