Commodity prices may drop if investment cycle turns
A downturn in China's investment cycle could push down global prices for some commodities, such as iron ore, by up to 12 percent, according to a new study by Standard & Poor's Ratings Services.
The study, titled The Investment Overhang: If China's Investments Dip, Commodity Prices May Slip, found a strong correlation between movements in China's investment-to-GDP ratio and prices for commodities such as iron ore and coal.
Under our downside scenario for China, prices for a range of commodities could decline by between 5 percent and 12 percent, averaging a fall of 9 percent, S&P said.
S&P added that China has an outsized impact on commodity prices.
"We've observed that trends in China's investment-to-GDP ratio and commodity price indices for the period spanning 1998-2012 have moved similarly," Chan said. "The strong correlation suggests that future movements in commodity prices could, over the near term, track the trend in China's investment share of GDP."
