Thomas further to my deflation scenario.
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Emerging markets struggle
Sagging commodity prices drag down exports, damage company margins
LONDON (C)Reuters - Falling prices for oil and other commodities in the wake of Asia's financial crisis are piling on the problems for many emerging markets, analysts said Friday.
"Falling commodity prices are bad for emerging economies in general, and the oil price is the most important of all. For Latin America, the Middle East and Nigeria it's the vital price," said ABN Amro economist Ian Campbell.
"It all adds to the risk of deflation at a global level," he added.
Oil tumbled to its lowest levels in 45 months Friday, hit by flagging Asian demand, high U.S. inventories and talk of increased Iraqi exports.
Gold is struggling around 18-1/2 year lows and base metals have fallen sharply since the beginning of the year. Semi-processed commodities also have suffered, with paper pulp and lumber prices tumbling as demand in Asia dries up.
The Goldman Sachs Commodity Index GSCI hit a four-year low of 167.27 Jan. 12 before inching back to 169.06 Thursday, led by recent gains in soft commodities.
The impact is rippling through economies at the macro and micro level as both government budgets and company margins are squeezed.
Among oil exporters, the slide in crude prices to near four-year lows already has triggered unusual speculative pressure on the Saudi Arabian riyal.
But it is in the mainstream markets of Latin America that investors may feel the impact most.
Venezuela will be the country most affected by the oil price fall, because oil accounts for 27 percent of gross domestic product (GDP) and 77 percent of total exports, ABN Amro believes.
Chile, meanwhile, is suffering from copper's tumble to four-year lows. The drop in prices, coupled with Chile's reliance on the Asian market, has knocked the peso.
Commodity analysts said copper is the most vulnerable of the base metals to the Asian slowdown because about 40 percent is consumed in construction, a sector hit hard by Asia's crisis.
South Africa is another target. Gold -- which has suffered from a combination of deflation fears, central bank sales and weak Asian demand -- still accounts for around a fifth of the country's total exports.
For ailing gold mines, the price fall has been disastrous. Anglogold Ltd., the world's biggest gold producer, said Thursday it plans to ax unprofitable production, cutting 1998 output by 17 percent.
Even the most tightly-controlled commodity market, diamonds, hasn't escaped. Falling sales, particularly in Asia, have halved De Beers' share price since last August.
Russia, too, is a potential casualty, because tax returns from the energy sector contribute a large part of budget revenues, and mining is a crucial part of the economy.
At the corporate level, Salomon Smith Barney this week warned investors in Russia's largest company, Gazprom, that falling oil prices will drag gas export prices lower shortly, although the broker still sees value in the stock.
Russia metal and mining giant Norilsk Nickel already has suffered badly, its share price tumbling by two-thirds since October.
But there are a few silver linings. Many soft commodities have suffered less from Asian fears, due to the dominance of supply factors, including worries about the impact of El Nino on crop production.
For oil importers -- including South Africa and Brazil -- there also is a windfall from lower input costs.
"There is no question that Asia has sent out a deflationary impulse," said Costa Vayenas, analyst at UBS.
"It's bad for exports, but there are some offsetting factors -- it's good for oil importers, like South Africa."
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LONDON (C) (Reuters) - Falling prices for oil and other commodities in the wake of Asia's financial crisis are piling on the problems for many emerging markets, analysts said Friday.
"Falling commodity prices are bad for emerging economies in general, and the oil price is the most important of all. For Latin America, the Middle East and Nigeria it's the vital price," said ABN Amro economist Ian Campbell.
"It all adds to the risk of deflation at a global level," he added.
Oil tumbled to its lowest levels in 45 months Friday, hit by flagging Asian demand, high U.S. inventories and talk of increased Iraqi exports.
Gold is struggling around 18-1/2 year lows and base metals have fallen sharply since the beginning of the year. Semi-processed commodities also have suffered, with paper pulp and lumber prices tumbling as demand in Asia dries up.
The Goldman Sachs Commodity Index GSCI hit a four-year low of 167.27 Jan. 12 before inching back to 169.06 Thursday, led by recent gains in soft commodities.
The impact is rippling through economies at the macro and micro level as both government budgets and company margins are squeezed.
Among oil exporters, the slide in crude prices to near four-year lows already has triggered unusual speculative pressure on the Saudi Arabian riyal.
But it is in the mainstream markets of Latin America that investors may feel the impact most.
Venezuela will be the country most affected by the oil price fall, because oil accounts for 27 percent of gross domestic product (GDP) and 77 percent of total exports, ABN Amro believes.
Chile, meanwhile, is suffering from copper's tumble to four-year lows. The drop in prices, coupled with Chile's reliance on the Asian market, has knocked the peso.
Commodity analysts said copper is the most vulnerable of the base metals to the Asian slowdown because about 40 percent is consumed in construction, a sector hit hard by Asia's crisis.
South Africa is another target. Gold -- which has suffered from a combination of deflation fears, central bank sales and weak Asian demand -- still accounts for around a fifth of the country's total exports.
For ailing gold mines, the price fall has been disastrous. Anglogold Ltd., the world's biggest gold producer, said Thursday it plans to ax unprofitable production, cutting 1998 output by 17 percent.
Even the most tightly-controlled commodity market, diamonds, hasn't escaped. Falling sales, particularly in Asia, have halved De Beers' share price since last August.
Russia, too, is a potential casualty, because tax returns from the energy sector contribute a large part of budget revenues, and mining is a crucial part of the economy.
At the corporate level, Salomon Smith Barney this week warned investors in Russia's largest company, Gazprom, that falling oil prices will drag gas export prices lower shortly, although the broker still sees value in the stock.
Russia metal and mining giant Norilsk Nickel already has suffered badly, its share price tumbling by two-thirds since October.
But there are a few silver linings. Many soft commodities have suffered less from Asian fears, due to the dominance of supply factors, including worries about the impact of El Nino on crop production.
For oil importers -- including South Africa and Brazil -- there also is a windfall from lower input costs.
"There is no question that Asia has sent out a deflationary impulse," said Costa Vayenas, analyst at UBS.
"It's bad for exports, but there are some offsetting factors -- it's good for oil importers, like South Africa."
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