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This month, the International Monetary Fund cut its forecasts for economic growth in emerging markets for this year and next.
China, India and other emerging economies have been the main drivers of demand growth in commodities ranging from copper to oil to soybeans.
“These commodity producers in emerging markets are no longer going to be the demand source that they were before,” Jeffrey Currie, global head of commodities research at Goldman Sachs, told a conference last week.
Weaker currencies in many emerging countries are increasing prices of dollar-priced commodities in local terms, dampening demand while encouraging more output, he said.
In China the dynamics are slightly different, with the local currency strengthening after authorities loosened controls, but it is still feeling knock-on effects from its neighbours.
On Thursday, China warned that slowing demand from emerging markets would hurt its export sector after trade data showed sales to southeast Asia slowed sharply in September.
“If we put this all together, it starts to create the makings of a significant bear market in commodities when you start to look three to five years out,” Currie said.
Less impact from upswing
Other analysts are not as downbeat, but many agree that the impact of emerging markets on commodities demand must be watched carefully.
They say investors in commodities should be wary about getting too enthusiastic about an economic recovery in Europe and the United States.
“The rebound of growth, which is usually bullish for industrial commodities, comes with a wrinkle... because DM (developed market) growth tends to be less raw-material intensive,” said Michael Widmer, metals strategist at Bank of America Merrill Lynch.
“Hence, we discount the impact of the cyclical upswing to some extent, which limits the upside especially to the base metals next year,” he said in a note.
Julien Garran at UBS said capital flows into emerging markets have accounted for every major turning point and every major trend in commodities over the last 30 years.
When capital is flowing into emerging markets, copper demand increases at about 1.5 times economic growth, but when flows reverse, it shrinks to only half the level of economic growth, Garran told the commodities conference.
Although the shift in growth to developed countries may be negative for commodities overall, it could be positive for energy since industrialised nations are much more energy intensive.
“With the growth leadership shifting from emerging markets to the OECD, this is certainly positive for energy overall,” Daniel Belchers, fund manager at Threadneedle Investments, said on a conference call on Friday.
“While neutral for commodities probably in the short term, it’s certainly bullish for the sector over the medium and long term ...ultimately emerging market growth will take hold towards the end of 2014 and into 2015.”
The decline in emerging markets was sparked in May when Federal Reserve chief Ben Bernanke signalled that the US central bank might have to begin scaling back its $85 billion in monthly bond buying.
This led to a sharp reversal in capital flows which dragged emerging markets currencies to multi-year lows and eroded their balance of payments.
Weaker currencies are inflating the cost of many imports.
“When you look at the price of oil denominated in US dollars at the end of August, they were 25% lower than they were in 2008. In Indian rupee terms, they were 25% higher,” Goldman’s Currie said.
But Belchers at Threadneedle pointed out that bumper harvests in agricultural markets have pressured prices and would provide a balancing effect for emerging nations.
US corn prices, for example, have slid 40% over the past 12 months.
