Australian shares follow commodity prices lower
SYDNEY: The price of oil, gold and other commodities fell sharply Thursday, bruising one of the main beneficiaries of the global boom in raw materials - Australia.
Australias main stock index, the SP/ASX 200, dropped 3.1 percent, wiping out nearly all of its gains from Wednesday, with miners taking a disproportionately hard hit. BHP Billiton, the worlds largest miner, lost 8.3 percent, Rio Tinto fell 7.7 percent and Fortescue Metals Group, long a favorite of the Australian stock market, lost 13.7 percent.
Commodities account for 17 percent of the Australian gross domestic product, and the strength of the market for its iron ore and coal is one of the main reasons why the Australian central bank has countered a global trend by continuing to raise interest rates.
Investors are worried that the credit crisis is going to take a severe toll on the U.S. economy and spill over to hit demand across the globe.
But analysts said that they generally believed that rapid economic growth in China and India would support commodities prices but that questions about the short-term outlook were causing commodity prices to fall.
“Quite clearly what is driving the commodity markets is still very strong underlying demand and some slowness in supply catching up with that demand,” said Terry Sheales, chief commodity analyst at the Australian Bureau of Agricultural and Resource Economics.
“But overlaying that at the moment is a fair bit of uncertainty around the place about what is happening with economic growth generally.”
Oil and metals prices fell sharply Thursday during Asian market hours on concern that a U.S. recession would reduce demand for raw materials. Oil fell below $100 a barrel to $99.59, compared with a record $111.80 earlier in the week. Gold fell to $904.65 a troy ounce, down from a recent record of more than $1,000. Copper also lost ground.
In part, the markets were also turned off because Rio Tinto and BHP Billiton are still in negotiations with their Chinese customers to establish a price for long-term ore contracts.
Last month, Vale, which is the worlds biggest ore producer and is based in Brazil, agreed to price rises of 65 percent to 71 percent, but Australian miners are holding out for more.
Continuing weakness in the commodities markets could undermine their position, though iron ore producers remain confident.
Vale announced this week that it had negotiated an 87 percent increase in prices for iron ore pellets with one of its Italian customers.
“This result indicates just how strong the market is at the moment and not just for pellet prices but for iron ore products in general, said Gervase Greene, a spokesman for Rio Tintos iron ore division. “It is a good indicator which will not go unnoticed.”
But Thursdays drop in the share prices of commodities producers also seemed to indicate a weakening in the markets confidence that the producers would escape the worst effects a U.S. economic slowdown because of Chinese economic growth.
China, with 36 percent of global steel production, is the most important factor in the iron ore market.
Australia is the worlds largest producer of coal and iron ore, the raw materials that have fueled the Chinese boom. Sheales, the analyst, said he did not expect a large drop in Chinese demand for iron ore even if the U.S. economy contracted. “We are assuming a small slowing in Chinese growth, but it is still very strong,” he said, “and we see that feeding into continuing demand for hard commodities.”
He said that with commodities like iron ore, the effect of a U.S. slowdown “may not be that great because the big growth in demand out of China for raw commodities is internally generated.”
