What’s next for commodities?


Growing concern about the strength of global demand recently prompted big falls in the price of many commodities.

How much have commodities dropped? It depends.

Take silver, which has been one of the fastest-rising commodities this year, fell the most losing 25% of its value in a five-day slide in early May. Oil prices also slid, down almost 10%.

Several equity markets followed commodities lower and retreated from the post-crisis peaks they reached in April.

It was a change in global monetary policy that initially shifted sentiment and prompted investors to reassess their riskier positions in growth assets such as commodities and shares.

For several months, emerging markets, notably China and India, have been raising interest rates to stop their economies and inflation from running out of control. The sands are shifting in the developed world too and earlier in May, the Fed chairman confirmed his intention to stop US monetary expansion in June. Strong emerging market growth and loose US monetary policy have been central to the global recovery since 2009 and the feeling among investors is that the tide is turning on both.

If the fall in commodity prices continues, it will help countries that have been struggling with inflation and a drop in the price of oil will surely be welcomed by motorists around the world.

But the companies whose profits rely on buoyant commodity prices, such as the miners and oil majors, will be hoping this is a minor correction in prices rather than the beginning of a longer slump.

The concern over the pace of global growth was reinforced when disappointing US jobs data suggested the recovery in the world’s largest economy may be spluttering. Further denting confidence Wall Street and in Europe were several influential companies that announced lack-lustre results.

There are plenty of good fundamental reasons why commodities should have paused for breath. Higher input prices are self-correcting to a degree so it should be expected that the rise in energy, metals and foodstuffs in recent months would be reflected in falling US gasoline sales, lower than expected GDP in the first quarter on both sides of the Atlantic, worse than feared jobless figures and higher oil inventories.

In the emerging world, which is the principal driver of global growth today, rising inflation has triggered a monetary tightening cycle that will inevitably hold back the developing economies. And that is starting to show up at German factory gates, where orders were lower than expected.

A falling dollar makes commodity prices more expensive to non-Americans so it often triggers lower prices.

Despite the recent gyrations, the structural case for commodities remains strong. China’s share of world energy consumption is expected to rise from 10% a decade ago to 25% in 10 years time. We are in the middle of a fundamental shift in the balance between the supply of and demand for commodities which overshadows the more cyclical factors at play.

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