Over just a few quarters, commodity prices surprised the markets, as a significant drop -off was superseded by a major recovery.
In a recent study by our economists, analysis suggests that commodity prices will continue on a long term downward trend. Looking beyond possible cyclical rebounds, the downward phase is expected to continue until a new 'structural growth engine' as powerful as China over the past twenty years emerges.
The recent decline in commodity prices can be attributed to low demand and excessive supply factors. A fall in Chinese commodity demand, alongside a levelling off of advanced economies' commodity consumption has led to a downward trend. Supply dynamics exasperated this, and the high production levels of commodity producers have been a key component in driving down commodity prices.
In terms of who will be most impacted, net commodity importing countries such as India and other OECD countries may initially benefit from lower prices. However short term increases in commodity consumption, arising from the falling price, will not be enough to catalyse demand in the long run. The slowdown of the Chinese economy does not foster an uptick in commodity demand from other emerging markets either, as much of Asian growth depends on China. Similarly the declining trend will continue due to supply adjustments materialising over a longer horizon. This lag in supply occurs due to the effect of higher debt burdens, as cut backs in production are postponed whilst prices remain low.
Until the demand and supply interactions re-calibrate with a structural increase in demand, and a corresponding fall in supply, the decline in commodity prices will likely continue.