Paul Bloxham is HSBC’s chief economist for Australia and New Zealand
Commodity prices have been broadly steady over the past year. This is despite China’s slowdown, fears of Federal Reserve tapering and nervousness about the emerging economies. Indeed, commodity prices are still over 120 per cent above their 1990s levels, in inflation-adjusted terms. This may have surprised some observers, particularly those expecting the end of the so-called commodities super-cycle and forecasting large commodity price declines. So far, it has not happened.
For some time now, our view has been that commodity prices will stay at much higher levels than in the late 20th century. While we expect strong mining investment to boost supply in coming years and keep commodity prices below their 2008 peak levels,we still think prices will stay structurally high. In short, the so-called super-cycle may be more super and less cycle.
Two elements drive our commodity prices outlook, the first empirical, the second theoretical. Empirically, history shows us that commodity prices are not in fact exceptionally high right now. Rather, they were exceptionally low in the 1980s and 1990s. Data for the past 150 years reveal that real commodity prices are actually currently around their long run average levels.
Our main theoretical argument is that commodity prices have been driven by shifts in the composition of global growth. Whereas global growth in the 1980s and 1990s was driven by western economies and their big services sectors, such as finance and information technology, growth in the past decade has come from the emerging economies and their huge appetites for infrastructure. Because growth in the emerging economies is much more commodity-intensive, demand for commodities has risen, which has supported prices.
Indeed, in terms of commodity intensity, global growth is now more similar to the immediate post-war period, than it is to the 1980s and 1990s. Recall that back in the 1950s, 1960s and 1970s, Europe was rebuilding, the US was still constructing its major highways and airports and Japan was industrialising.
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