With global growth weakening and developed economies entering a prolonged phase of slowdown, analysts have been forecasting the end of the commodity super cycle for the past couple of years. However, commodities have started rallying again, with industrial production picking up in several developed economies. Commodity prices closely track industrial production, which is why every time China’s growth and industrial data show even a modest uptick, commodities start moving up. Analysts, however, are of the opinion that this bounce-back is unlikely to last beyond December. However, both fundamental and technical indicators suggest the uptick might not last.
Prices of commodities, like any other product, are not only driven by demand but supply. So, a pick-up in the global economy will have a bearing on prices but, eventually, the level of supply in the system will have a bigger bearing on prices than demand. Commodity analysts say during the 1980s and 1990s, when global industrial production averaged 3.7 per cent per annum, commodity prices fell by four per cent a year.
But prices picked up after 2000 when demand from emerging markets, namely China, picked up. Also, supply could not keep pace with incremental demand. The historical relationship between global industrial growth and commodity prices fell from 2000. Consequently, analysts are of the view that even now when global industrial production is up, the prices of commodities will not revive meaningfully. Today, growth in emerging markets has a greater bearing on commodity prices than in developed economies.
Credit Suisse says: “It is clear that after showing a relatively poor fit up until the new millennium, emerging market industrial production growth has correlated very well with changes in broad measures of commodity prices over the past decade. This relationship has held very well over the past couple of years, suggesting the dramatic slowdown in EM IP (emerging markets industrial production) growth has been the main factor dragging commodity prices lower in the past few years.”