Commodities Supercycle: In the past decade, the rise in commodity prices have undone the decline of the previous century, rising to levels not seen since the early 1900s. Despite current declines, research by McKinsey Global Institute shows that demand for energy, food, metals, and water should rise inexorably as 3bn new middle-class consumers emerge in the next two decades. The global car fleet, for example, is expected almost to double, to 1.7bn, by 2030.
The plunge in the price of oil has got the greatest attention globally but several other key commodities have also been falling.
Brent crude, the international benchmark and US oil, known as West Texas Intermediate (WTI), lost more than half of their value since mid-2014 and on Monday WTI fell below $50 a barrel for the first time since April 2009, before finishing the day at $50.05.
High prices trigger more supply and in the case of the US, it's also gaining from fracking technology.
US oil production is set to reach 9.4m barrels a day in May, which would be the highest monthly average since November 1972, according to the US Energy Information Administration.
Output from shale formations coupled with deep-water and land-based wells have pushed demand for imported oil to the lowest since at least 1995, according to data compiled by Bloomberg.
Existing wells remain profitable because operating costs going forward are usually $25 or less, Tom Petrie, chairman of Petrie Partners Inc., said in an interview last month on the Bloomberg Surveillance television program.
Compounding the drift to deflation in the Eurozone, the global price of food has also been on the slide - the UN's Food and Agricultural Organisation's Food Price Index, which tracks sugar, dairy, meat, cereals and vegetable oils, was down 6.4% in November 2014 compared with the year before.
In 2011 and 2012 droughts in the US led to smaller harvests and higher maize prices. Deutsche Bank economists say that during the 2013/14 harvest year, farmers in Brazil and the US, two of the world's biggest producers of cereals (e.g. maize) and oilseed (e.g. soya) reported record crops.
The Commodity Price Indices compiled by Germany's Hamburg Institute of International Economics (HWWI) for energy raw materials (including coal), industrial raw materials (e.g. iron ore, steel scrap, non-ferrous metals) as well as the food sector in total (e.g. cereals, soybeans) in November fell to 2010 levels.
The HWWI price index in November quoted in US dollars was down 21.9% (in EUR: -15.6%) in 12 months.
Deutsche Bank economists says that the gradual cooling of the Chinese economy hits industrial raw materials, whose prices last peaked more than three years ago. "After all, China became the world's most important consumer of non-ferrous metals and iron ore in the past decade. China requires these inputs for its booming construction industry, major infrastructure projects and still fast-growing industrial production. At last reading, China imported about two-thirds of the iron ore traded on the world market and about half the volume of many important non-ferrous metals."
The price of iron ore for delivery to China fell 47% in 2014
The Daily Telegraph says that the surplus in iron ore supply which began to emerge at the beginning of the year is expected to widen to around 300m tonnes of ore by the end of 2017 as major producers such as Rio Tinto and BHP Billiton continue to consolidate their output into bigger and more productive mines.
"Over the last year the IHS Material Price Index has fallen 20%. The advisory firm’s chief economist Nariman Behravesh expects that commodity prices will slide by a further 10% on average in 2015 despite the increasing chance that China’s government will underwrite a massive stimulus programme to revive growth."
In Part 2 we look at historical trends - until the start of the recent supercycle in 2003, the real price of food was as low as it was during the Great Depression.
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