Phrased slightly differently, commodity prices have fallen well over 50% since April 2011, but oil prices have only participated in that rout since June 2014. Energy (broadly defined) accounts for only about 31% of the Bloomberg Commodity Index, so there is definitely a bigger story unfolding here.
I suggest you take a quick look at chart 1. As you can see, commodity prices have fallen out of bed pretty much across the board. Anything from sugar to iron ore is down significantly, and it is really hard to blame the fall in sugar prices on China, even if I try my best. China is largely self-sufficient on sugar and is not a major player in international sugar markets (chart 2), so what is going on?
Rising corporate leverage in emerging markets
One theory – and the one I subscribe to – is that many commodity producing countries have chosen to ignore the fact that, not that long ago, virtually the entire world suffered from the GFC and have continued to pile on debt, as if there is no tomorrow. You may wonder why that is. I am sure there is more than one reason, but attractive borrowing conditions (low interest rates) have to be one of them.
The net result today is that whilst corporates in developed markets have not added to pre-crisis debt levels, and in many cases actually reduced overall debt, corporate debt levels in EM countries are at an all-time high (chart 3).
Interest rates are currently low on either side of the Atlantic, but U.S. bank regulators are not coming down as hard on U.S. banks, as regulators over here are on European banks. Adding to that, the fact that many commodities are priced in U.S. dollars has made the USD an obvious choice of currency for borrowers in emerging markets, many of whom are commodity producers.