90 seconds at 9 am: Hard commodity prices slump

Oil prices hit 7yr low; iron ore prices hit 6yr low; Beijing on 'Red Alert'; China fx outflows quicken; UST 10yr yield 2.26%; NZ$1 = 66.5 US¢, TWI-5 = 71.8

8th Dec 15, 7:23am by David Chaston

Here's my summary of the key events overnight that affect New Zealand, with news the US dollar is pushing higher.

And commodity prices are slumping.

Oil is now at a seven year low. OPEC's white flag over the weekend brought about by Iran's refusal to limit production means the cartel is now toothless. The market rules, and supply far exceeds demand. Prices have dropped to seven year lows. The cost of energy is now its cheapest in real terms, ever.

And that means air travel is likely to get less expensive.

Overnight, iron ore prices fell to US$39.06 per tonne, the lowest Qindao benchmark price since consistent records started in 2009. (In 1988, using a different basis, the IMF said iron ore prices fell to US$10.88/tonne.) This is a very long way down from the record US$165/tonne reached in January 2011. Not only is the key market of China not buying, new major supply is coming on stream, especially in Australia. Many industry observers don't see the iron ore price ever recovering, and production shutdowns are very possible.

One place that could really do with less oil and steel making is Beijing. Authorities there issued a 'Red Alert' over air pollution today and said the extreme smog may last all week.

Beijing is also watching a growing flood of money leaving the country. Their massive foreign-exchange hoard fell in November to its lowest level in more than two years. The official media said these falls were larger than expected.

Trading in dairy futures shows that the slump in hard commodity prices has not hit soft commodities. WMP futures are holding. The next dairy auction is next week. Tomorrow, Fonterra will be giving an update on its current season payout. No change is expected from its current $4.60/kg estimate.

In New York, the UST 10yr yield benchmark followed up is 1 bp slip on Friday with another one today and is now at 2.26%.

The US benchmark oil price is down yet again, now at US$38/barrel, while the Brent benchmark is at only US$41/barrel.

The gold price also fell, now at US$1,078/oz.

Accentuating the trend, the New Zealand dollar has also fallen back today. It is currently at 66.5 US¢, down 1c, at 91.5 AU¢ and at 61.3 euro cents. The TWI-5 is now at 71.8.

If you want to catch up with all the local changes on yesterday, we have an update here.

The easiest place to stay up with event risk today is by following our Economic Calendar here ». And don't forget to vote in the Flag Referendum.

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12 Comments

by Roelof | 8th Dec 15, 7:59am 1449514779

Kate... Hope u get to see to see this..

Gareth Morgans "Big Kahuna"... is being introduced in Finland...
I have always thought it was a great idea..

http://qz.com/566702/finland-plans-to-give-every-citizen-a-basic-income…

by two otherguys | 8th Dec 15, 8:12am 1449515546

Must be a flaw in that article - says Finland has a population of 5.4 million, of which 4.9 million are adults

by DFTBA | 8th Dec 15, 12:43pm 1449531825

It isn't a flaw. The link in the article leads to the Finnish statistics site, in which it gives a break down of their population by ae.
As adults are people over 18, and life expectance is quite a mutliple of that, is is reasonable to expect that minors are a reasonable small percentage of the over all population.

Population by age group, end-2014

Age Males Females Total
0– 4 153 486 146 650 300 136
5– 9 155 317 148 856 304 173
10–14 149 597 142 702 292 299
15–19 156 492 150 090 306 582
20–24 174 762 167 324 342 086
25–29 174 020 165 545 339 565
30–34 183 123 172 264 355 387
35–39 177 106 167 323 344 429
40–44 160 576 154 103 314 679
45–49 181 712 177 605 359 317
50–54 188 443 187 142 375 585
55–59 183 866 187 031 370 897
60–64 183 321 191 909 375 230
65–69 181 087 195 527 376 614
70–74 110 037 128 836 238 873
75–79 85 233 113 191 198 424
80–84 55 027 88 410 143 437
85–89 28 807 62 247 91 054
90–94 8 472 27 055 35 527
95– 1 379 6 080 7 459
Total 2 691 863 2 779 890 5 471 753

by sharetrader | 8th Dec 15, 8:14am 1449515679

interesting but would you want it in a country with such easy and open immigration policies, would that not increase the flood if you could plant your family in a country and they all get paid

by Roger Witherspoon | 8th Dec 15, 8:44am 1449517442

Those Finns are a tough minded lot. If they can make it work using a foreign currency (ie Euro) then we certainly can (imagine if we had the USD as our currency). Be interesting to see what happens.

by Stephen Hulme | 8th Dec 15, 8:52am 1449517942

Frequently employed and often abandoned currency pegs suggest failure.

by Stephen Hulme | 8th Dec 15, 8:20am 1449516058

.And that means air travel is likely to get less expensive.

A recent arrival told me Air New Zealand impose a ~Stg or NZD 200.00 fuel surcharge out of London - is that correct?

by Roger Witherspoon | 8th Dec 15, 8:38am 1449517111

I heard it was a "climate change tax" ie tax grab by the UK. Shorter flights attract less. I did try to find a cheaper route by flying to Amsterdam and then hopping to a local UK airport with Ryanair, but the logistics beat me. Or maybe a return flight to Paris with a stopover in London. Also, a return flight from UK to NZ is usually about $800 less than a return flight from NZ (what Air NZ price gouging, surely not...). There must be a way of getting past this stuff.

by xelnaga | 8th Dec 15, 12:04pm 1449529452

You are definitely being price gouged flying Auckland to London return. Its much much cheaper booking it the other way. Find that about a lot of things in NZ though. People seem to just pay it though.

There is some kind of climate tax on long haul flights from the UK. Stopovers on the continent can save money. Booking flights to Japan at the moment and they are fully half the price with a quick stopover in Paris.

I'd pay the money to avoid Ryanair though. Ugh.

by steven | 8th Dec 15, 12:10pm 1449529802

Unless its changed Air NZ etc will not allow you to book in the UK when you are going to take off from NZ. I tried to do that with my UK Credit card when I wanted to fly home a few yeasr ago and they denied it.

by Stephen Hulme | 8th Dec 15, 10:05am 1449522355

Foreign exchange reserves were never in the country - by default they reside in the country of origin and sales of US reserves to credit the foreign USD accounts of Chinese domestic banks involves the PBOC purchasing their domestic Yuan reserves - a liquidity draining operation.

But a significant tightening of US monetary conditions is realised without much comment. US 3 month Treasury Bill yields have risen from zero at the end of September to 25 bps today. Check 3 mth tab for details

by waymad | 8th Dec 15, 3:32pm 1449541961

DC and BH - the WaPo is waking up to zoning = whole lotta pain...

https://www.washingtonpost.com/news/volokh-conspiracy/wp/2015/12/05/the…