An oil well. Eric Kounce/CC
A personal view from Ian Stewart, Deloitte’s Chief Economist in the UK. Subscribe to & view previous editions at: http://blogs.deloitte.co.uk/mondaybriefing/
Cheap money has driven a surge in asset prices around the world. The pries of equities and bonds are at record highs and in much of the world so, too, are house prices.
One class of assets that has been late to the party, and doesn’t look pricey, is commodities.
This broad category includes everything from agricultural products, such as rice, to base and precious metals and most energy sources.
Commodity prices tend to move in long, boom, bust cycles. They boomed in the 1970s as oil producers drove prices higher. One of the dominant themes in that decade was of commodity scarcity limiting global growth. That consensus was shattered by the fall in commodity prices through most of the 1980s and 1990s. By the late ‘90s The Economist pronounced that the world was drowning in oil. It didn’t last long. From the late 1990s demand from emerging economies and a quickening pace of globalisation led to a quadrupling of commodity prices by 2008. City analysts talked of an endless upwards commodity ‘supercycle’. The global financial crisis put paid to that theory. By early 2016 commodity prices had fallen by two thirds from their 2008 peak.
The latest data from the World Bank, released this month, shows that many global commodity prices have started to recover. Energy commodities, including coal, natural gas and oil, have risen in value in the last year with coal seeing the largest gains. China, which accounts for roughly half of global coal consumption, has been a major swing factor supporting prices.
Metals prices have also seen sharp rises, with aluminium, copper, iron ore and lead growing at double digit rates over the last year. The price of copper, which is used in everything from wiring, to plumbing and for coins, has risen by more than 30%.
The revival in commodity prices reflects four main factors.
Firstly, a synchronised global recovery has driven demand for commodities, such as copper, iron ore and coal, which are sensitive to the economic cycle.
Second, because most commodities are priced in dollars a weaker dollar has exerted downward pressure on prices, helping support consumption.
Thirdly, oil producers have restricted output in an attempt to reduce the supply glut and support prices. Natural disasters have also hit production of some commodities. The price of Brazil nuts, for instance, has risen by around 60% over the course of the year as a result of the Amazonian drought brought about by the cyclical El Nino weather pattern. The shortages are so bad that Brazil has become a net importer of Brazil nuts.
Fourth, some commodities are benefiting from a step change in technology. Growth in the use of battery storage capacity and electric cars, for instance, constitute a vast potential source of demand for lithium, cobalt and nickel.
The rising tide has not lifted all boats. Precious metals have generally bucked the trend as the global recovery has reduced demand for ‘safe haven’ assets. The prospect of further interest rate rises, which increases the attractions of cash relative to commodities, has also weighed on demand for assets such as gold. Meanwhile, with some notable exceptions, agricultural prices have moved sideways this year.
Rising commodity prices signal a stronger world economy and, within that, better prospects for commodity-dependent economies such as Nigeria and Russia. Higher commodity price have also driven up inflation in the rich world, crimping consumer spending power and encouraging central banks to tighten monetary policy.
And what of the future?
The recovery in prices is just over 18 months old and, by the standards of the last 20 years, prices do not look especially high. Agricultural price indices have not seen much growth at all. In a world of demandingly priced assets commodities are lagging behind. Barring a global downturn they probably have further to rise.
PS – a fascinating new analysis by the UK’s Office for National Statistics shows that foreign owned firms operating in the UK have far higher levels of productivity than their UK equivalents. Keeping industry, region and size of firm constant, such businesses were 74% more productive in terms of the value of output per worker per hour than UK firms.