Fuel price drop leads to cheaper commodities

The longest commodity trading slump in a generation is being compounded by lower fuel prices.

According to Societe Generale SA and Citigroup, the price of a range of commodities is set to keep falling, as energy accounts for as much as half the cost to produce food and metals, Bloomberg reports.

Cheaper oil lowers the price floor for mining companies and farmers to remain profitable, meaning corn may drop another three per cent, cotton 6.5 per cent and gold as much as five per cent, SocGen estimates.

Bloomberg's Commodity Index of 22 items is heading for a fourth straight annual drop, the longest slump since its inception in 1991.

One of the reasons behind the slump is a slowing of China's economy, reducing demand for a number of items. China is the top consumer of energy, metals, pork and soy beans.

"There's been a structural change in oil, and there's more to come," said Michael Haigh, the head of commodities research at Paris-based SocGen. "This will also ripple through other commodity markets, in some cases directly, and others indirectly."

A price war between US shale oil firms and OPEC producers has sent prices tumbling. Brent crude, the international benchmark, has dropped by 41 per cent since the end of June to $66.73 a barrel.

Consumers are to benefit from falling oil prices, as they can expect to pay less for food. A US Energy Information Administration analysis of US Department of Agriculture data found that inputs such as fuels, lubricants, electricity and fertiliser account for about 45 per cent of the operating expenses of growing and harvesting rice.

The mining sector is also set to be a winner, as energy makes up 30 to 40 per cent of operating costs.

According to Citigroup, a further 20 per cent drop for oil, along with gains for the dollar, would reduce thermal-coal costs by $8 a tonne, or 13 per cent, and iron ore by $4 a tonne, or about six per cent.