SINCE late last year commodity prices have been on a long, slow downward slide. Yet many in the markets, like Jeremy Grantham, a British money manager, reckon that the commodity-price spike of the past decade is but a taste of what's to come. This week's Free exchange column looks at a paper that seeks to show what history has to say about future price moves:But, see also yesterday's FT Alphsville:
David Jacks, an economist at Simon Fraser University, assembles figures on inflation-adjusted prices for 30 commodities over 160 years...Over the very long run commodity prices display a marked upward trend, having risen by 192% since 1950, and by 252% since 1900. But an upward trend has clearly not translated into global famine, and not all commodities are alike.Long-run rises have been most pronounced for commodities that are “in the ground”, like minerals and natural gas. Energy commodities especially have boomed, soaring by roughly 300% since 1950. Prices of precious metals have also risen, as have industrial ingredients like iron ore. In contrast, prices for resources that can be grown have trended downwards (see chart). The inflation-adjusted prices of rice, corn and wheat are lower now than they were in 1950. Although the global population is 2.8 times above its 1950 level, world grain production is 3.6 times higher.Yet over shorter horizons prices can move far out of line with the long-run trend. A price series will sometimes enter a generational departure from trend known as a supercycle. Mr Jacks finds that supercycles tend to cluster around periods of mass industrialisation or urbanisation, when soaring commodity demand butts up against supply that is slower to respond....MORE
The end of the end of the end of the commodities supercycle is nigh, in Asia
That’s from Deutsche Bank today.
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We joke, we joke. A little. Deutsche had of course already joined the commodities-supercycle-is-dead chorus, and this note is not from the commodities side but by Asia chief economists Taimur Baig and Jun Ma.
Ma, who covers China, wrote an interesting and widely-read note about China’s pollution constraints earlier this year. This one however has some key capitulation moments for some of us. For example:
It was tempting to look at China’s high-growth track record (with little variation) as a sure-fire indication of robust demand to persist for years to come. Emergence of India, which also saw accelerating economic growth, was seen as another source of persistently sizeable demand.The underwhelming realities of those calls are just part of their explanation for why the supercycle is over. The other reasons are: structurally declining demand in OECD countries; the fruits of investment in new production bringing prices lower; and the increase in shale gas and oil production further adding to supply.
We won’t go into Deutsche’s whole rationale on energy and soft commodities. Their energy production outlooks are rely on the standard forward looking stuff (EIA forecasts and the like) which seem too early to call, especially on shale. Baig and Ma are particularly optimistic on Chinese shale gas, and say the potential for the country to beat its targets should not be discounted. But there are technology hurdles, not to mention a lack of usable water where it’s most needed.
On the other hand, there is evidence that oil demand is in structural decline in the OECD, and perhaps even in emerging countries — at least relative to GDP, in the latter group.
Anyway, here’s how Deutsche modeled some changes in gas and oil prices which they picked....MUCH MORE
