The commodities boom has come to an end and prices have plummeted in line with the rest of the global economy. But has the market now reached a kind of stability?
Six months, it turns out, is a very long time in commodity prices. In the middle of last year, prices across the whole range of commodities were hitting unprecedented highs, building on a spike that had begun accelerating the year before and showed no sign of stopping.
Explosive economic growth in China, drought in Australia, the profiteering antics of global speculators, the mother of all booms ¨C a remarkable mix of elements had come together to produce a commodities price surge unlike any seen before.
It was a development that divided economists and analysts even more deeply than usual. Some argued that it was just one step in a decades-long superboom that would run and run. Others warned that such price rises simply couldn¡¯t go on, and would eventually trigger a downturn in the very economies that fuelled them.
And it looks like the latter were right. The downturn has come with vengeance, and commodity prices have collapsed along with just about every other kind of market. By the end of the year, the S&P GSCI, the most widely followed indicator of commodity prices, had fallen by 46.5 per cent as demand dried up and speculators pulled out of commodities to deal with more pressing matters such as imminent bankruptcy.
But is the turbulence over? Have the panicky days of sky-rocketing price rises and plunging falls ended for those of us unfortunate enough to have to buy commodities as part of the day¡¯s work of keeping our businesses running? Or should we all be making the most of a temporary lull before the next gut-wrenching shunt one way or the other?
We can afford to relax, at least a little, says Julian Jessop, chief international economist at research consultancy Capital Economics. ¡°It¡¯s not going to happen again,¡± he says. ¡°The sort of move we saw in oil prices, for example, from $20 up to $150 and then back down to $30 or $40, that¡¯s a once-in-a-generation event.
¡°The bubble burst. A lot of people have been arguing that there¡¯s a long-term upward trend in commodity prices. I¡¯m sceptical of that, but even if it¡¯s true, commodity prices are not immune to the economic cycle and to the crisis in the financial sector. So we¡¯ve seen sharp falls, and I don¡¯t see anything on the horizon that¡¯s going to lift them higher again.
¡°I think there¡¯s a fair case for saying that things will now stabilise. Prices are now back to more sustainable long-run levels, but if I had to guess on the direction over the next year or so I¡¯d still say down, because after all we¡¯re heading for basically the worst global downturn since the Great Depression.¡±
Lee Hopley, head of economic policy at the UK-based manufacturers¡¯ organisation EEF, believes prices might have further to fall before they show signs of a turnaround. ¡°We¡¯ve seen commodity prices fall on the back of global demand, and I don¡¯t know if we¡¯ve reached the bottom yet,¡± she says.
¡°I think the demand and supply tensions that pushed commodity prices sky-high last year will return when the global economy starts to recover, but the timing of that is very uncertain at the moment. And whether we¡¯ll see oil prices back at the levels they were last summer is the $150 question.¡±
But what has the great price spike of 2008 taught companies that depend on commodities to keep going? Are they any better prepared for a similar experience now than they were then?
Many are, believes Malcolm Pinkerton, senior analyst at Verdict Research. ¡°A lot of people didn¡¯t see that sharp spike coming, because there were some unusual circumstances around it,¡± he says. ¡°But at the moment retailers in particular are being very savvy with their cost control, and they¡¯ll certainly look to mitigate any rises as much as possible.
¡°A lot of them will anticipate another rise coming, and they¡¯ll be ready to absorb the cost when it does. They¡¯re designing out more expensive material and designing in cheaper alternatives.¡±
And, while commodities may have fallen well down the list of companies¡¯ priorities, the experience of astronomical prices has had a lasting impact on how many businesses approach their use of resources, says Hopley.
¡°Commodity prices are not a major concern for companies at the moment ¨C it¡¯s a lack of demand. But the price rises created an increasing focus on improving resource efficiency and how raw materials are used. Energy¡¯s a good example of that ¨C there was an increased focus on energy efficiency.
¡°There¡¯s also a flip side to this, which is that in some cases it did provide some business opportunities for companies in terms of providing energy and resource-efficient products and upgrades, for example.¡±
Jessop of Capital Economics believes the response to the crisis caused by the price bubble has also triggered developments on both the supply and demand sides that will limit the volatility of any future price rises. ¡°A lot of the supply and demand responses to that bubble will actually help to smooth prices in future. I would expect there to be more supply over the next several years in many of these commodities. And demand might be less volatile because people have learnt that commodity prices can go down as well as up, so you¡¯ll have rather less naive money piling in.
¡°I would also have thought there¡¯d be more interest in hedging than there would have been before, but of course hedging¡¯s quite expensive when you¡¯ve had all this volatility. There¡¯s a price that has to be paid for somebody else taking the risk.¡±
And the appetite for risk is another of the features of the business environment that, along with credit and jobs in investment banks, has dried up sharply in recent months, and that¡¯s as clearly illustrated in the commodity markets as anywhere else. Which was one of the few commodities to end 2008 higher than it began? Gold, of course, the time-honoured haven of the risk-averse investor
