The commodity super-cycle – in which commodity prices reach ever-higher highs, and fall only to higher lows – isn’t over. Despite the euphoria around shale gas – indeed, despite weak global growth – commodity prices have risen by as much as 150 per cent in the aftermath of the financial crisis. In the medium term, this trend will continue to pose an inflation risk and undermine living standards worldwide.
For starters, there’s the convergence argument. As China grows, its increasing wealth and urbanization will continue to stoke demand for energy, grains, minerals and other resources. The U.S., for example, consumes more than nine times as much oil as China on a per capita basis. As more of China’s population converges to Western standards of consumption, demand for commodities – and thus their prices – will remain on an upward trajectory.
Worst-case estimates have China’s real GDP growing at 7 per cent a year over the next decade. The supply of most commodities, meanwhile, is forecast to grow by no more than 2 per cent annually in real terms. All else being equal, unless China’s commodity intensity (the amount of a commodity consumed to generate a unit of output) falls dramatically, its demand for commodities will be greater this year than it was last year.
As long as China’s commodity demand grows at a higher rate than global supply, prices will rise. And the rapid economic growth that China’s leaders must sustain to lift people out of poverty – and thus prevent a crisis of legitimacy – places a floor under global food, energy and mineral prices.
To be sure, intensity of use has fallen for some commodities, such as gold and nuclear energy; but for others, such as aluminum and coal, it has risen since 2000 or, as is the case for copper and oil, declines have slowed markedly or stalled at high levels. As the composition of China’s economy continues to shift from investment to consumption, demand for commodity-intensive consumer durables – cars, cellphones, indoor plumbing, computers and televisions – will rise.
There’s also the issue of the so-called reserve price (the highest price a buyer is willing to pay for a good or service). The reserve price places a cap on how high commodity prices will go, as it’s the price at which demand destruction occurs (consumers are no longer willing or able to purchase the good or service).
For many commodities, such as oil, the reserve price is higher in emerging countries than in developed economies. One explanation for the difference is accelerating wage growth across developing regions, which is raising commodity demand, whereas stagnating wages in developed markets are causing the reserve price to decline. By implication, if nothing else, global energy, food and mineral prices will continue to be buoyed by seemingly insatiable emerging-market demand, which commands much higher reserve prices.
Ultimately, emerging economies’ absolute size and rate of growth both matter in charting commodity demand and the future trajectory of global commodity prices, with per capita income clearly linked to consumers’ wealth. If people feel rich and enjoy growing wages and appreciating assets, they’re less inclined to cannibalize other spending when commodity consumption becomes more expensive. They just pay more and carry on.
Of course, upward pressure on commodity prices also stems from supply-side challenges. It’s not just that global supplies of resources are increasingly scarce, but also that supplies are increasingly falling into inefficient hands.
Around the world, governments are taking greater control of resources and imposing policies that hamper global production and ultimately force prices higher. Such price increases can prove particularly inflationary in countries that import commodities. And they can be disastrous to exporting economies, which risk rapid currency appreciation and thus a loss of competitiveness.
There’s a temptation to focus on the short-term, tactical drivers of commodity-price movements at the expense of giving longer-term, structural factors their due. While short-term factors – political instability, say, or weather-related disruptions – are major determinants of prices, they tell only part of the story.
The economic fundamentals of supply and demand remain the key factors in driving the direction of commodity prices and determining whether the commodity super-cycle will persist. In practical terms, this means that oil prices, for example, are more likely to hover near $120 (U.S.) a barrel over the next decade, rather than $50; and we’re unlikely to see a $20 barrel of oil ever again.
Dambisa Moyo is the author, most recently, of Winner Take All: China’s Race for Resources and What It Means for the World.