Last weekend saw the steepest fall in commodity prices in the last five decades. Is this a temporary blip or does it signal the end of the commodity boom that has now lasted an extraordinarily long period, forcing experts to use the term commodity super cycle? A super cycle has occurred only twice in the last 150 years. This one has pushed up real prices the most in percentage terms over the last six years. One common explanation about the unduly long commodity cycle is the rise of Asian economies, especially China and India. Huge demand combined with growing supply constraints in commodities like agriculture products, fossil fuels and metals have kept the cycle going. Opponents of the commodity super cycle thesis have, however, been quick to point out that the growth of demand from the two most populated countries has been more than matched by the deceleration in growth from its peak levels in South America, East Asia and developed economies like the EU and Japan.
So what of the sudden drop in prices end last week? It seemed to have been more of a correction of the spurt in prices over the last two months?prices of edible oil and grains went up sharply while that of most metals and ores shot up even faster, going up by a quarter or even by two thirds in some cases. That bout of price increase surpassed earlier projections, including those by multilateral organisations like the World Bank, which had estimated that prices of most agriculture commodities, raw materials and fossil fuels would continue to increase within manageable levels in the current calendar year while that of most metals, including precious metals, would either stagnate or even dip sharply. One trigger for last week?s fall was the unloading of commodity holding by big investors, including hedge funds, which are now having to make up for losses in equity and derivative markets. Plus, creditors were pressing commodity speculators to increase margins in response to heightened risk perceptions generally. These are nervous times for those who bet in any sort of market, and commodity markets couldn?t have been immune. The key question whether the commodity cycle will retain momentum if and when there?s a protracted global slowdown.
