As economic activity collapses, the whole world is entering a severe global recession

November 17, 2008

We’re probably in a global recession at the moment. The rapid collapse of commodities, including gold, had all but assured that outcome. Indeed, there’s little need to follow all these developments, since they’re on an automated run once the manufacturing bubble that has been mentioned here many times before burst. The most important point is that the collapse of the commodity bubble is going to continue, and that this is going to have very severe implications on emerging market growth for the next few years, not months.

Cotton users are halting orders from the U.S., the world’s biggest exporter, at the fastest pace in at least a decade as the economic slowdown erodes demand from China and sends prices to a six-year low.

Delays, cancellations and order reductions of U.S. upland cotton by foreign buyers rose almost sevenfold from a year earlier to 329,600 running bales (74,752 metric tons) in the first 13 weeks of the marketing year that started in August, data from the U.S. Department of Agriculture show. The level is the highest since at least 1998.

Cotton prices are down 55 percent from a 12-year high in March, and Barclays Capital says demand is so weak no rally is likely to last. Commodity buyers from metal recyclers and sugar processors to clothing makers are struggling to honor contracts signed when prices were higher.

“We are seeing quite a few delays,” said Andy Weil, president of Weil Brothers Cotton Inc. in Montgomery, Alabama, and past president of the American Cotton Shippers Association. “Demand is in a terrible state of affairs. When Chinese exports depend on American and Europeans economies, which are now in a recession, they have no demand for raw materials.”

Demand, Prices Fall

China, the world’s biggest cotton importer, canceled or delayed 34,100 bales of U.S. orders in the week ended Oct. 23, or 4,100 bales more than its new orders, according to the USDA. Total reductions reached 41,300 bales that week, including buyers in Bangladesh and Indonesia. A week later, cancellations and delays were 11,500 bales from buyers in China, Turkey and Indonesia, government reports show.

The USDA said on Nov. 10 farmers will sell upland cotton, the most common variety in the U.S., for 45 cents to 55 cents a pound in the year through July 31, down from an October estimate of 51 cents to 62 cents, and below 59.3 cents in the previous year.

Cotton for March delivery fell 0.41 cent, or 1 percent, to 42.1 cents from 92.86 cents on March 5, at the time the highest price for a most-active contract since September 1995. The 23 percent drop in October was the biggest monthly decline since at least 1986.

Global cotton use will drop 3.3 percent to 119.3 million bales in the current marketing year, the USDA estimates. China will consume 51 million bales, down from an initial estimate of 55 million and the first annual decline in a decade, as consumer spending falls, the USDA said.

`Very Difficult Time’

China‘s cotton imports from January through October dropped 8.3 percent from a year earlier to 1.87 million metric tons, according to the Beijing-based Customs General Administration.

Jiangsu Yulun Textile Group Co., a yarn spinner in Jiangsu province, buys cotton to last less than a month, compared with three months of inventories in the past.

We are having difficulty with financing,” Zhang Jianhong, manager of materials at Jiangsu, said by telephone from Qingjiang. “The risk of importing cotton is very high. The downstream businesses, the clothing manufacturers, owe us money. All we have are bunch of IOUs. It’s a very difficult time.”

Cotton consumption will be lower than previously expected in Pakistan and Turkey, the largest importers after China, according USDA forecasts.

Demand `Non-Existent’

For my company, the demand is fairly non-existent,” said Angie Goodman, president of Lubbock, Texas-based ACG Cotton Marketing LLC, which ships cotton mainly to Turkey. “They are buying in a hand-to-mouth method.”

Same-store sales by department stores in the U.S., the world’s largest economy, fell 11 percent last month and 19 percent for luxury retailers, the International Council of Shopping Centers said Nov. 6. Macy’s Inc., the second-biggest U.S. department-store chain, is buying less merchandise and reducing capital spending to prepare for a disappointing spring shopping season, Chief Financial Officer Karen Hoguet said on an earnings conference call with analysts Nov. 12.

The same picture for copper, the collapse of which has been ongoing for quite some months now:

Not even $586 billion of emergency spending by China can slow the plunge in copper, the worst- performing metal since the commodities market crashed in July.

Global inventories more than doubled in the past four months as the economic slowdown spread. U.S. auto sales slumped 32 percent in October to the lowest level since January 1991. A report this week may show U.S. builders broke ground on the fewest houses in at least a half century, curbing demand for cables, wires and pipes. China, the world’s biggest copper user, is heading for its slowest growth in almost two decades.

Copper is an indicator for the world economy and sets the pace for other industrial metals because an average 400 pounds (181 kilograms) are used in homes and 50 pounds in cars, according to the Copper Development Association. Prices collapsed after rising as high as $8,940 a metric ton on the London Metal Exchange July 2. The International Monetary Fund in Washington said the U.S., Europe and Japan will fall into a recession simultaneously for the first time since World War II.

China is the key to commodity prices because the country is the largest user of iron ore, aluminum, zinc and copper. The nation’s economy may grow 7.5 percent or less next year, Morgan Stanley and Credit Suisse Group AG say. That would be the slowest pace since 1990, data compiled by Bloomberg show.

Chinese Demand

Commodity prices, measured by the Standard & Poor’s GSCI Index of 24 raw materials, have plunged by more than half from their record on July 3 as the global credit crisis threatened to push the world into a recession, reducing demand. Crude oil has slumped 56 percent in four months.

`A Bubble’

“It was a bubble,” Stephen Roach, chairman of Morgan Stanley Asia Ltd., said in an interview Nov. 13. The last one was in the early 1970s when “you had the same type of global growth boom that we’ve had in the last 4 1/2 years,” he said. “The boom has gone to bust. The global economy is growing at 2 to 2.5 percent, less than half the pace we’ve been running at.”

Slowing Output

China faces a “formidable challenge,” Mu Hong, a top planning official, said on Nov. 14. Export growth and inflation slowed in October. Industrial output grew at the slowest pace in seven years and money supply expanded by the least since 2005.

Steel output in China, producer of a third of the world’s supply, dropped 9.1 percent in September, the Brussels-based World Steel Association said on Oct. 22. Power production fell in October from a year earlier, the first decline since February 2005, the China Securities Journal said on Nov. 7.

“We are in a period of very severe production cuts as mid- stream industries such as steel reduce both raw-material and product stocks, with massive reverberations through raw-material markets,” Macquarie said Nov. 10.

China pledged “fast and heavy-handed investment” in housing and infrastructure through 2010 and a “relatively loose” monetary policy in a plan unveiled Nov. 9. The package offered funding for housing, infrastructure, railways, power grids, social welfare and rebuilding. The country plans thousands of kilometers of highways and railroads as it speeds development of its resource-rich western regions.

Seeking the Bottom

“The Chinese are very pragmatic,” said Richard Elman, chief executive officer of Hong Kong-based Noble Group Ltd., a supplier of iron ore, coffee and grains. “They will revitalize the economy. We’ve seen a leveling of steel prices internationally. We’re encouraged that the bottom may be here,” he said in an interview on Nov. 11.

More money is being pumped into second-tier cities, Robert Theleen, chairman and co-founder of investment capital firm ChinaVest Ltd., said in a Bloomberg Television interview on Oct. 29. As China’s economy slows, more factories will shut, unemployment will climb and people will return to the countryside.

“Those are the issues that are going to cause indigestion in Beijing,” he said.

US Slump

Industrywide U.S. auto sales fell for the 12th straight month in October, extending the longest slide in 17 years and hurting demand for metals. October total sales dropped to 838,156 from 1.23 million, according to Autodata Corp.

General Motors Corp. said this month it may run short of funds before the end of the year and Chrysler LLC said survival would be difficult without aid.

Moody’s reports that companies that are close to bankruptcy are at the highest level since 2002. The fact is that they’re going to far exceed the record of the past ten years.

The number of companies at risk of running out of cash reached the highest level since 2002 in October as job losses and tightening credit weakened consumer spending, according to Moody’s Investors Service.

The percentage of companies with an SGL-4 rating, Moody’s lowest level of liquidity rating, rose to 14 percent last month from 12.6 percent in September, the highest since the index was designed in 2002.

Companies are increasing capital reserves as banks tighten access to credit following more than $966 billion in writedowns and losses since the start of 2007. What began as a cash crunch for small companies with limited amounts of debt has spread to major U.S. companies, with “tens of billions” of dollars in rated debt being downgraded, Moody’s said.

General Motors, Ford

The New York-based ratings company reduced its rankings of the liquidity positions of 19 companies in October, including U.S. automakers General Motors Corp., Ford Motor Co., and Trump Entertainment Resorts, the Atlantic City, New Jersey-based casino company founded by Donald Trump.

“Even with the benefit of the U.S. government’s $25 billion guaranteed-loan program, we think GM’s liquidity profile will continue to erode in 2009,” the analysts wrote. Detroit-based GM had its rating cut to SGL-4 from SGL-2.

Ford’s $29.6 billion in cash and committed credit lines will cover expected requirements through 2009, the report said. Dearborn, Michigan-based Ford’s rating fell two levels to SGL-3.

The two most frequent influences of a company’s liquidity rating are cash flow and covenant issues, Moody’s said. The level and direction of a company’s SGL rating indicate the likelihood of default.

Moody’s used a disproportionately large sample of SGL-4 companies when it established its Liquidity-Stress Index in 2002, the company said. Last month’s rate of 14 percent is the highest when adjusted for the over-sampling in the first two months of the index, Puchalla said in a telephone interview.


And the deleveraging process has a lot more to go, with hedge funds being only the first line on the cull:

Hedge-fund assets may fall to about $1 trillion by the middle of next year, a decline of almost 50 percent from their peak in June, because of market losses and client withdrawals, Citigroup Inc. said in a report.

Managers are likely to see investors, led by funds of funds, pull 20 percent of their money, Tobias Levkovich wrote yesterday. Funds of funds are middlemen who select hedge funds for their clients.

“The so-called `Swiss hot money’ wants out and funds are responding,” Levkovich wrote, referring to Swiss investors who have a shorter investing period than pension funds. “Citi’s credit analysts estimate that hedge funds have raised cash to roughly 40% of assets already in anticipation of known redemptions and possibly unanticipated demands from investors.”

Hedge funds lost an average of 16 percent this year through October, according to data compiled by Hedge Fund Research Inc., as stock and commodity markets tumbled and lending tightened. The industry has lost money in only one year — a 1.45 percent decline in 2002 — since the Chicago-based firm began tracking returns in 1990.

The future of the hedge-fund industry looks set to be one in which leverage will not be used as aggressively, partially as a result of recent losses but also because the prime brokers will not provide it easily,” Levkovich said.

Regulatory filings last week by 38 hedge funds with more than $1 billion in assets each show that selling and market declines cut the value of their reported holdings by about 30 percent to $273 billion.

The Japanese economy has officially entered its first recession in seven years:

Gross domestic product shrank 0.1 per cent in the three months to September 30 from the previous quarter, following a quarterly decline of 0.9 per cent in the second quarter. The third-quarter decline was worse than economists’ forecast for flat growth or a mild upturn.

The economy’s decline forced the government of Taro Aso, the prime minister, to unveil a Y5,000bn ($51bn, €40bn, £34bn) stimulus package last month while the Bank of Japan cut interest rates on October 31 for the first time in seven years – by 20 basis points to 0.30 per cent.

At the same time the yen has gained 9.4 per cent since the end of September, adding to the pain of Japanese exporters as their goods become more expensive for overseas buyers.

The Tokyo stock market has suffered a 44 per cent fall this year.

Even suicides are hitting the newswires nowadays, a sad but inevitable outcome of a collapsing economic bubble:

A 36-year-old trader at Brazil’s securities exchange shot himself in the chest in an attempted suicide on the trading floor, BM&FBovespa SA said.

The trader, who works for Itau Corretora, the brokerage unit of Banco Itau Holding Financeira SA, was taken to Santa Casa hospital in Sao Paulo and listed in critical condition, a hospital spokeswoman said. No one else was injured in the incident, an exchange spokesman said.

Trading in derivatives and commodities was halted for 15 minutes after the shooting occurred shortly after 3:30 p.m. local time (12:30 p.m. New York time), BM&FBovespa, Latin America’s largest securities exchange, said in a statement. Traders said people on the floor scurried after the incident, which took place in the interbank rate contract pit.


2 Responses to “As economic activity collapses, the whole world is entering a severe global recession”

  1. While it is clear commodity prices have taken a beating since mid July, we should not be overly pessimistic. The Chinese stimulus package which is heavily weighted towards infrastructure, including railways, ports and urban development,will inevitably draw on natural resources including the base metals.

    And while copper prices have fallen significantly, this build up of demand in one of the world’s largest consumers of copper is bound to feed through to higher prices. It will not be too long before we see a destocking of the currently high levels of LME copper inventories, as high as they have been since March 2004.

    And I notice that recently a Rio Tinto seminar projected that demand for their core products, aluminium, iron ore and copper, would double over the next decade or so. The main driver would be urbanisation in China.

  2. moneymill said

    The collapse of the Chinese manufacturing sector will only be alleviated partially by the Chinese government’s spending plan. The scale of overinvestment in that country is way beyond anything we in the West would want to believe, and the government’s inefficient, half-hearted, and belated attempts to control the overheating of the economy never really worked there. Now they’re forced by the market to take the policy choices that they should have taken a long time ago.

    As for Rio Tinto’s seminar.. with all respect, what do you expect them to say as a mining company? They’ll try to be optimistic, naturally. It’s the dollar vs. everything else, and it’s going to pulverise commodities, if you forgive the dramatic language.

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