Has one of recent history’s worst slumps in commodity prices, witnessed since the second half of 2008, seen the bottom? There can be no clear answer to this question, though developments in the last few weeks tend to give this impression. The prices of some key commodities, including industrial and base metals, have tended to look up in recent weeks. Among the commodities that seem to have turned the corner, the most notable is copper which has seen a major price recovery after hitting the bottom in December 2008. This is due largely to the resumption of copper imports by China for building up its reserves in anticipation of a fiscal stimulus-driven industrial recovery. Gold has been on the upswing ever since the beginning of the economic slowdown which blocked most other avenues of safe investment. Many agricultural commodities, including industry-related commodities like rubber and sugar, and food items, have similarly tended to firm up and may even scale some more heights in the coming months, on steady demand growth. As for oil, prices have recovered modestly from the low point reached some weeks ago, and the futures market is now seeing prices that point to expectations of a continued price surge. Various commodity price indices reflect the new trend; after reflecting price drops for most of the past year, these indices now show a clear uptick.
All this would be a sharp break from the recent past. Going by a global commodity price index that monitors 19 major items, prices had plummeted by over 35 per cent in 2008, and by a further 4 per cent in the first quarter of this calendar year. The fall in demand on account of the economic slowdown, the first such decline since World War II, and the worst contraction in global merchandise trade in 80 years, was largely responsible for this price meltdown.
The sustenance of the upturn in commodity prices will depend crucially on the China factor (where the government last month came out with a 4 trillion yuan ($ 580 billion) economic stimulus package) and the optimism about the recovery in many other countries, including industrialised economies like the US, and fast emerging economies like those of India, Brazil and East Asian nations. However, there is, at the same time, a fear that the revived demand may remain partly unmet as many companies had curtailed production and abandoned new projects in response to the recession and the consequent piling up of inventories. Thus, there may be a transition phase, when producers and suppliers jack up prices because of the investment lag.
Where agricultural commodities are concerned, the factors driving domestic and global prices differ from item to item. While the prices of rubber are likely to remain high in 2009, in view of the anticipated steep fall in production (which may touch its lowest level in one-and-half decades in key rubber producing countries, including Thailand, Indonesia, Malaysia and India), sugar prices may find support because of large Indian imports. Edible oil prices, notably of the most traded palm oil and soyabean oil, will be determined largely by continued heavy imports by India and China and uncertainty over output, especially when it comes to the US soya crop. Food crops, meanwhile, will continue to witness price volatility in view of weather-induced fluctuations in output and continued rise in demand. The protectionist policies adopted in recent months by many food-exporting countries may also influence prices.
