Worldwide growth has seen commodity prices rocket over the past decade as expanding populations and emerging market prosperity have created an unprecedented demand for raw materials. This, coupled with recent stock market volatility and high UK inflation rates, has driven investors towards tangible assets.
China’s rapid GDP growth and middle-class boom has played a key role in the commodity ‘super cycle’. Over the past 10 years its residents have seen their annual earnings quadruple, which in turn has resulted in urbanisation projects, massive redevelopment and a flourishing middle-class that have begun consuming luxury goods.
Commodities, like most assets, are subject to long-term trends determined by macroeconomic developments and, specifically, by industrialisation and growth in emerging countries.
Physical assets, such as gold, silver, oil, gas, copper, zinc and agricultural products have replaced technology stocks to become the gravy train of the past decade. But like the dotcom bubble of the late 1990s, many investment analysts fear this most recent commodity super cycle is drawing to an end.
Graph 1 shows that average commodity price performances, based on Reuters, S&P and Dow Jones index benchmarks, were down 13 per cent in 2012, following a 10-year period that saw a 161 per cent increase in value across all sectors. Among the biggest areas to suffer were precious and base metals, with every other commodity sector also recording price falls, except for energy.
Given how inextricably the commodity market is linked to China and the teetering economic growth patterns of other Bric nations (Brazil, Russia and India), there are fears of a domino effect. In short, after years of heavy investment and strong returns, the global slowdown of emerging economic growth is now said to be impacting the demand for pivotal raw materials.
End of an era?
Before China’s GDP growth began slowing, its unparalleled rise led to a boom for resource-rich countries. Since 2000, while demand in the rest of the world remained relatively constant, China grew at an average annual rate of 15 per cent. As a result, China has fuelled global growth in these markets, so its recent economic slump has caused commodity prices to fall.
Evidence of China monopolising demand can be seen in virtually all commodity sectors. For example, in 2010, before China’s economy began to stabilise, it accounted for about 40 per cent of global demand for base metals, 23 per cent of agricultural crops and 20 per cent of non-renewable energy resources.
Although China’s growth rate has slowed for seven successive quarters, it still continues to advance at a faster rate than the world’s other major economies. Nevertheless, with the commodity market being so heavily reliant on demand from China, this period of slower growth is causing many commodity analysts to panic.
French bank and global investment management service Société Générale, however, maintains an optimistic stance on China’s growth prospects, indicating in a recent report that “positive momentum” will see things pick up this upcoming year. “Recent data points to a turnaround in the China growth story, boosted by government-led infrastructure spending. Asia’s export contraction looks to be turning a corner, demand is picking up [and] restocking is approaching.”