Commodities | Dec 03 2008
By Chris Shaw
Investor confidence is so low equity prices in some cases are now being priced on trailing P/E (Price to earnings) ratios lower than in the Great Depression. At the same time, credit markets are pricing in a contraction of economic growth also not seen since that period.
According to Barclays Capital, commodity markets are faring little better. The S&P GSCI Index is down a little more than 60% since peaking in July of this year in what the group notes is a fall of unprecedented dimensions.
While it is difficult to compare prices now to what happened during the Great Depression given metals are much more freely traded on commodity exchanges now, the group notes using average annual prices for copper, lead and zinc, prices by the end of 1933 were just 40% off their value in 1929. This suggests falls to date this time around have been of a similar magnitude.
Individually, the group notes there have been some variations, as both lead and zinc have fallen by more this time around than they did during the falls of the Great Depression. In contrast, the declines in copper have not been so severe. During the downturn of the late 1920s and early 1930s, copper prices settled at around 30% below their peak levels.
This fall in prices on the back of weaker demand also led to cuts in output, as the group points out production during the period fell almost 40% from its highest levels.
Factoring this into today’s environment, Barclays notes copper prices would still have significantly further to fall if the Depression era fall in percentage terms were to be matched. This would imply a price of something close to US$2,000 per tonne, which compares to a current price of around US$3,500 per tonne.