World Commodity Prices, A Truly Global Challenge

The world faces a sustained rise in commodity prices on such a massive scale that it looks like threatening social, political and economic stability.

As we move through the early years of the 21st century, commodity prices are causing major problems for world political leaders.

Heads of large multinational corporations have to take difficult decisions, while millions of the planet’s citizens struggle to cope with these rising prices.

At a time when food inventories are at 50-60 year lows, world food demand seems to be growing along with the expanding world population.

Over the long term there are serious implications unless yields can be improved and growing competition between food and biofuels for the grains is addressed in a practical way.

Rising living standards in the developing economies of Asia in particular, have led to higher consumption of meat, so driving up demand for grain crops associated with livestock farming.

The price of rice has seen record highs as supplies cannot meet the demand, leading to civil disorder in many nations.

World organisations like the G8 and the UN Food and Agriculture Organisation have held summits to try to find practical solutions to the problems of high food commodity prices.

Energy Crunch and Peak Oil

The world economy still has a high dependence on petroleum and its many derivatives.

Whether it is for unleaded gasoline to drive the growing fleet of automobiles on the planet or jet fuel for the growing air travel market, there is sustained upward pressure on crude oil prices.

As a finite resource that is diminishing, particularly the so-called “easy oil”, the upward trend for oil prices will continue, with many predicting $200 oil in the near future.

Even OPEC members, the major world producers with the largest reserves, are struggling to increase daily production to meet the surge in global consumption.

Adding to the problem, as was identified at the recent Saudi oil summit, even if Saudi Arabia increases output, it will likely consist mainly of the heavy, sour crude grade oil variety.

And OPEC has projected that world demand for oil will increase by up to 50% by 2030 as car use increases dramatically in the emerging economies.

But the automobile relies mainly on unleaded gasoline, a distillate of light, sweet crude oil, which is depleting faster than the heavy, sour grades.

So the challenge to moderate oil prices is to invest in new refining capacity that can deal with the heavy sour oils and convert them to gasoline and other light distillates.

As with most commodity prices in the energy sub-sector, natural gas prices have also risen strongly as demand continues to grow.

Imports of liquefied natural gas (LNG) have increased considerably into the US and other developed countries.

Now the emerging economies of Asia are looking to natural gas as a strategic energy source. This competition will only serve to keep energy prices high for the foreseeable future.



Industrial Metals and Economic Development

The rapid growth rates seen in emerging economies are forecast to continue for at the medium term.

Strong growth in the BRIC (Brazil, Russia, India, China) economies has already fuelled a significant part of the rise in world commodity prices.

Going forward the rates of urbanisation in some developing economies is forecast to remain higher than actual GDP growth in those countries.

This expansion in infrastructure will lead to an inevitable demand for key industrial metals needed for the new infrastructure.

The principal metals driving this investment are iron ore, aluminium and copper.

Future challenges are for metal producers to address supply shortages with new investment in mining development. Yet the high oil price negatively impacts on mining due to the proportion of energy in the input costs.

Within such a scenario the likely outcome is for industrial base metal prices to remain strong.

Precious Metals

In times of crisis precious metals, particularly gold, are seen as safe haven investments, when other assets appear very risky.

Just look at recent history, such as the Middle East conflicts in the 60’s and 70’s and Soviet invasion of Afghanistan are good examples.

And during periods of high inflation the precious metals, such as gold, silver, platinum and palladium, have been in demand because they hold their value in real terms.

Power supply problems to mines in South Africa have in recent times caused supply shortages, so the price of metals like palladium and platinum can spike.

With growing industrial demand, especially from developing economies like China and India, for platinum in auto catalysis, precious metals prices are more likely to strengthen going forward.

The future for commodity prices

With the world population expanding at a rapid rate, longer life expectancy in developed nations, and huge infrastructure development in emerging economies, the strong demand for resources means commodity prices are likely to remain strong for the foreseeable future.

Whether it is gasoline for the growing number of cars, more sugar for ethanol biodiesel, rice as a staple food for billions of the world’s population or iron ore and aluminium for growing urbanisation, commodity prices are unlikely to fall without abundant and cheap alternatives being found.

Return to Commodity Trading Today