Over just a few quarters, commodity prices
surprised the markets, as a significant drop -off was superseded by a major
recovery and then another downturn.
In a recent study by our economists, analysis
suggests that commodity prices will continue on a long term downward trend.
Looking beyond possible cyclical rebounds, the downward phase is expected to
continue until a new ‘structural growth engine’ as powerful as China over the
past twenty years emerges.
The recent decline in commodity prices can be attributed
to low demand and excessive supply factors. A fall in Chinese commodity demand, alongside a levelling off of
advanced economies’ commodity consumption has led to a downward trend. Supply
dynamics exasperated this, and the high production levels of commodity
producers have been a key component in driving down commodity prices.
In terms of who will be most impacted, net
commodity importing countries such as India and other OECD countries may
initially benefit from lower prices. However short term increases in commodity
consumption, arising from the falling price, will not be enough to catalyse
demand in the long run. The slowdown of the Chinese economy does not foster an
uptick in commodity demand from other emerging markets either, as much of Asian
growth depends on China. Similarly the declining trend will continue due to
supply adjustments materialising over a longer horizon. This lag in supply
occurs due to the effect of higher debt burdens, as cut backs in production are
postponed whilst prices remain low. 
Until the demand and supply interactions
re-calibrate with a structural increase in demand, and a corresponding fall in
supply, the decline in commodity prices will likely continue.