Commodity super cycle turning downward, says RBI – by Rajesh Bhayani (Business Standard – September 30, 2014)

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In latest commodity super-cycle, inflation-adjusted prices of commodities rose 60-500% between 1999 and 2010

Mumbai – Global commodities prices have already reached inflexion points and are headed downward, according to the RBI (Reserve Bank of India). The central bank, as a part of its monetary policy announced today, published the analysis based on the last five decades’ data of prices of commodity both energy and non-energy, to show that commodity super cycle may be turning downwards.

Commodity super-cycles are long and rapid rises in prices across commodities, propelled by persistent increases in demand that outstrip supply. The policy statement said that, “since 1894, four super-cycles have been identified, with the last one starting from the late 1990s and attributed to rapid and sustained industrialisation and urbanisation in China and other emerging economies”.

During this latest commodity super-cycle, inflation-adjusted prices of commodities rose in the range of 60 to 500 per cent between 1999 and 2010, the year in which they peaked. Oil price rose by 467 per cent, metals by 202 per cent and agricultural prices by 77 per cent — the largest price increases among all the four commodity super-cycles. The sharp rise in prices are after adjusting for inflation and hence the issue of whether the super cycle is ending arises.

Nic Brown, Head of Commodities Research at London based Natixis said, “We would agree that weak global growth (“stable but secularly lower levels of growth”) is one of the key characteristics behind the relative weakness of commodity prices over the past few years.”

RBI finds another striking characteristic of the recent super-cycle relative to previous cycles which is high correlation across commodity prices and high price volatility, possibly owing to financialisation of commodity markets and increase in supply disruptions due to natural disasters.

Nic says, “While commodity producers have invested heavily in new capacity to supply what was expected to be rapid global growth, the underperformance of economies such as China (relative to expectations) has resulted in global surpluses that are now helping to depress prices.

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