Is the commodity price boom over?
Advertisement
It started, and perhaps would end, with China. The global integration of an economy that had grown at double digits since China joined the World Trade Organisation (WTO) in December 2001 perhaps marked the start. Will China also now mark the end?
Until the last decade, the real price, taking off inflation - of commodities had fallen for 150 years. It was the reason why developing countries wished to move away from exporting natural resources and concentrate manufacturing.
Because agriculture prices fall over time, countries like Brazil, where more than 90 per cent of exports were coffee during the immediate post-war period, would experience worsening incomes.
While prices of its exports would fall over time, imports became relatively more expensive. So, the country's terms of trade (export prices relative to import prices) would fall, leading to worsening incomes for the country.
So, during the 1950s and 1960s, Brazil diversified and reduced coffee to less than 10 per cent of its exports.
Coming to an end?
But, it changed during the past decade such that Brazil, Australia and Canada, along with other countries, found themselves exporting more commodities as China and to a lesser extent other industrialising Asian countries began to demand them.
Prices were driven up and peaked in 2008, even while the US and parts of Western Europe underwent the worst recession in a century. And the commodity boom perhaps even helped Australia to be the sole G10 major economy to avoid a technical recession during the global financial crisis.
What has driven that boom may be coming to an end or, at least a levelling off. It is difficult to say what part of the extraordinary rise in commodity prices is due to China.
Some economists estimate that it could be as much as 50 per cent. Others are more dubious. But, with China accounting for over 40 per cent of demand of the world's iron ore, copper and other metals, it is clearly a significant factor.
And as China moves into a new era of sub-10 per cent economic growth, there will be an impact.
The demand for natural resources depends on industrial output. In the 2000s, industrial output in China grew at 22 per cent per annum on average while the economy powered ahead. That era is likely to be over, as industrial output now grows at less than 10 per cent.
That is still a healthy pace of growth, but it is significant slowdown. In other words, the growth rate has halved, dropping to single digit growth from double digit.
Welcome relief
The demand for commodities is likely to slow down as well.
Just because the pace has slowed does not mean that prices would fall. They may just level off since China is still growing strongly and other countries in developing Asia, such as Indonesia, are industrialising.
But, China's slowdown is likely to mean that the boom of the 2000s may be over unless the other Asian giant, India, can industrialise and see a take off in its growth rate. The affair with commodities may then continue.
But, Andrew Mackenzie, chief executive of the world's largest diversified mining company BHP Billiton, doesn't think that India or any country in Asia could replicate China's demand.
For the rest of the world, a respite from rising commodity prices pushing up inflation and the cost of living would be a welcome relief during a period of slow recovery in the US and Europe.
Graphic Business/Ghana