Global Recession or Economic Stagnation: Take Your Pick (RIO, VALE, SCCO, FCX, MT)

Prospects for the global economy are currently as dark or darker than they’ve been since the financial crisis began three years ago. Consumers and investors likely see either another recession or at least a stagnating economy in their immediate future and whether it’s one or the other doesn’t make much difference. The effects will be the same.

Analysts at Goldman Sachs are predicting a 40% chance that the world’s developed markets will into economic stagnation.  A survey by Bloomberg showed that global investors expect the debt crisis in Europe to lead to a second recession.  The primary cause for either is laid at the feet of the European sovereign debt crisis, and the side effects of a Greek default or a break-up of the European Monetary Union with at least one current euro-based country pulling out.

The impact has been felt most directly in the commodities markets, where economic conditions generate quicker reactions. Iron ore producers Rio Tinto plc (NYSE: RIO) and Vale SA (NYSE: VALE) have said that their order books remain full and that they have not received any order cancellations or requests for delayed shipments. Copper miner Southern Copper Corp. (NYSE: SCCO) has indicated the same thing. Freeport-McMoran Copper & Gold Inc. (NYSE: FCX) is dealing with a strike at its Peruvian and Indonesian mines, which may force the company to declare force majeure if the strikes are not settled soon. BHP Billiton plc (NYSE: BHP) maintains that Chinese demand is solid for iron ore, coking coal, copper, and other metals.

ArcelorMittal (NYSE: MT) is reported to be talking to its Spanish unions about a temporary shutdown of one of its plants in Spain during the last two months of this year. The company has already shutdown two European blast furnaces and other operations due to lack of demand for steel in Europe.

The main prop to iron ore and copper deliveries has been Chinese demand, but China’s iron ore inventories are already high and that if steel prices don’t improve, iron ore imports could be delayed. Prices for China’s steel continue to fall, down -0.3% yesterday compared with the day before. It won’t take long at that rate for orders to be cancelled or slowed down.

Uncertainty over how successful the latest European plan will be in restoring confidence in both the continent’s banks and its major currency is weighing down commodities prices. But the real slide won’t begin until China cuts its orders, and unless the world’s developed economies can get back on a growth track, those cuts could be just around the corner.

Goldman’s prediction of stagnation is already true, so the bank didn’t go out on a limb. Bloomberg’s survey indicated that 75% of the respondents believe that the eurozone will fall into recession within 12 months. The European banking sector and its piles of sovereign bonds will lead the global economy downward according to a third of respondents.

Europe may well lead the downturn, but the world’s emerging economies can make it immeasurably worse.

Paul Ausick