Commodity Prices: A Modest Rise, or the Start of a Sustained Upward Trend?

A rise in commodity prices, fueled by soaring commodity prices and China's growing impact on the global economy, has analysts and economists questioning whether this is a temporary blip or the beginning of a long-term upswing in the prices of commodities. Since October 2001, the Economist's all-items index of commodity prices has risen by 59%, with prices of industrial raw materials increasing by 73% and crude oil prices more than doubling from under $20 a barrel in December 2001 to over $31 today.

Key Takeaways:

• The recent surge in commodity prices has been fueled by a combination of a cyclical recovery, a weak dollar, and the rise of non-Japan Asia, particularly China.
• China's growing impact on commodity markets is substantial, with its share of world consumption of soybeans, cotton, refined copper, and oil having increased significantly over the past few years.
• Despite the rise in commodity prices, the current surge is not as great as previous surges in the late-1980s and mid-1990s, and when adjusted for inflation, prices are still well below previous peaks.
• The dollar's value as a unit of account has changed significantly, partly due to the US current account deficit and expansionary Federal Reserve monetary policy, which will likely support commodity prices in the medium term.
• China's growth is likely to continue having a significant impact on commodity markets, and its demand for primary commodities will drive supply expansion in the coming decades.
• The current rise in commodity prices is a modest one, and it is unlikely to produce a decisive reversal in the long-term trend decline in real prices of commodities.

Statistics:

• The Economist's all-items index of commodity prices has risen by 59% since October 2001.
• Prices of industrial raw materials have increased by 73% since October 2001.
• Crude oil prices have more than doubled from under $20 a barrel in December 2001 to over $31 today.
• China's share of world consumption of soybeans has risen from 11% in 1997 to 19% in 2003.
• China's share of world consumption of cotton has risen from 25% in 1999 to 32% last year.
• China's share of world consumption of refined copper has jumped from 11% in 1999 to 20% last year.
• The recovery in the global economy is expected to continue, with April's Consensus Forecasts showing 3.7% global growth this year and 4.3% in the Asia Pacific Region.
• The US is forecast to grow by 4.6% this year, up from 3.1% last year.

Sources:

• "Soaring commodity prices" by Martin Wolf, The Financial Times, April 2004.
• Economist's all-items index of commodity prices.
• Consensus Forecasts.
• World Bank statistics on global trade and economic growth.