JOHANNESBURG (miningweekly.com) – Recent sharp falls in commodity prices are “disproportionately” large when compared with prevailing weaknesses in the global economy and a number of prices are, thus, likely to recover during the second half of 2012, Absa Capital economist Jeff Gable argues.

Having tracked the growth performance of the world economy against the Dow Jones-UBS Commodity Index, the bank shows that a gap has developed between economic performance and commodity prices – the global slowdown (outside of Europe) having been relatively modest, while commodities “have fallen off a cliff”.

“This is probably more about a commodity mispricing as opposed to global growth forecasts being too optimistic,” Gable argued when releasing the Barclays affiliate’s June quarterly outlook statement.

“It’s a contentious area . . . but our sense is that the commodity prices have probably over-reacted.”

The decline had been amplified by outflows from commodity-linked exchange-traded products, which were particularly pronounced during May. But underlying support for commodities, Gable believes, remains in place.

Using oil as a proxy, but stressing the distinctive nature of each commodity, the bank shows that many oil producers are unable to cover their all-in costs at an oil price of $90/bl. For this reason, oil prices are likely to begin recovering and the decline will be “short lived”.

Similarly, it anticipates that other commodities, such as wheat, copper, coal and, to a lesser extent, gold will recover in the coming. However, the bank’s medium-term outlook for platinum has been trimmed to the $1 600/oz level from levels of above $1 800/oz.

Absa Capital is also maintaining its 8% 2012 growth outlook for China, which remains a key commodity-consuming economy.

“Our sense is that the 6.75% growth rate of the first quarter will be met with broadly similar growth in the second, of somewhere between 6.5% and maybe 7.5%,” Gable says, while describing second-quarter growth as “the bottom”.

“The tensions around the Chinese growth outlook are by design. Chinese authorities are trying to engineer a fundamental change in the growth model . . . away from being entirely export- and investment-led and more towards consumption. And, those things don’t happen smoothly.”

However, Barclays believes the Chinese authorities are beginning to intervene to deal with the slowdown, which has been exacerbated by the worse-than-expected performance of much of Europe.

As a consequence, the economic authorities have lowered interest rates, changed the language around targeted lending, helping buyers of first homes and re-emphasising certain types of infrastructure development.

“The Chinese authorities have a strong handle on this.”