Commodity markets should brace for another assault on prices if, as is widely expected, the US Federal Reserve tightens policy in December and the dollar strengthens further.

One reason is production, much of it in non-dollar countries such as Chile and Russia, where a higher dollar means rising revenues in pesos and roubles respectively.

It also means lower wage costs, paid in local currencies, allowing non-US producers to cope with falling prices.

Emerging markets

Another is slower growth in emerging markets where a lot of debt is denominated in dollars and is due to be refinanced over the next two to three years, fund managers say.

Higher borrowing costs may mean slowing economies in emerging markets, a major source of commodity demand growth in recent years.

Throw into the mix plans by top consumer China to shift its economy towards consumer-led growth and away from heavy industry and the stage is set for commodity prices to lurch lower.

Excess capacity

“Weaker overall world growth, particularly in emerging markets, means all that excess capacity which has been created and is still being created won't be absorbed for a long time,” said London & Capital Investment Director Ashok Shah.

That excess capacity was created by record high prices. Copper spiked through $10,000 a tonne in February 2011 and is now down by more than half near $4,700, while Brent oil, now around $40 a barrel, almost hit $150 in July 2008.

Creating capacity can take between three and five years. Some of it is already producing; some is due to start producing over the next year or so.

Falling costs

Lower prices have led some miners to cut output, but many have been able to maintain their margins due to reduced costs, allowing them to keep producing in already oversupplied markets.

In an analysis of publicly reported producer costs for about 40 per cent of the world’s copper mine production outside China, JP Morgan found that highest cost producers had seen their costs fall 14 per cent this year.

The US bank expects costs to fall another five per cent next year to around $4,000 a tonne, which reinforces its bearish outlook for copper.

A major reason behind lower costs is the stronger dollar against currencies such as the Chilean peso, down about 40 per cent against the dollar since May 2013 and the Russian rouble, which has halved in value.

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