Once in awhile, it is interesting to take a different view. To step back from the day to day and look at situations from a wider or longer-term perspective. This is as true of commodity markets as it is of life, so a recent Financial Times Short View report on commodity prices makes for particularly thought-provoking reading whether you agree with its conclusions or not.
The report is presented, as most of the FT’s excellent Short View reports, in video format aided for clarity with charts that unfortunately we cannot exactly replicate here but with the assistance of Index Mundi we can provide some good examples.
Prices Through the Centuries
The report is not based on the FT’s own research, but rather on that of BCA Research who have compared a basket of commodities prices against consumer prices since 1680, and found that over time the 2 do not fundamentally diverge. Although demand for commodities do, for a variety or reasons, surge from time to time, the resulting spike in prices stimulates the market to respond in a number of ways such as investing in more mines, driving technological developments to extract metals more efficiently or more cheaply and, of course, to find alternative materials that reduce the original demand.
Think of high oil prices stimulating both the fracking revolution and curbing demand through long-term improvements in energy use efficiencies – Volkswagen (XETRA:VOWG) not withstanding – for example.
The Primacy of the Trend Line
The main conclusion that comes out of BCA Research’s paper is that prices always come back close to the trend line for consumer prices, and that, on this measure, commodity prices still have further to fall. BCA contends there have only been 3 commodity bubbles. 1 around the 1920s, 1 in the 1980s following the oil shock of the ‘70s and the last following China’s unprecedented mass migration to the cities, a process that is, if not over, then likely to move at a much more gradual pace in the future as industrialization slows down and the population ages.
The figure quoted in terms of further falls in commodity prices is another 40%, so think of oil at $30 per barrel, and where might that leave metal prices? Take a look at these charts covering a 30 year period and draw some conclusions.
Copper Grade A Refined Cathode
Hot-Rolled Steel Coil
And then, over a similar time frame, the Commodity Price Index along with a more specific Metals Price Index, the 2 follow closely to each other, and both suggest they have further to fall to the long-term average.
As my colleague, Raul De Frutos, observed recently we are still some way from seeing a floor under commodity prices. Unprecedented investment in and expansion of the mining sector following China’s equally unprecedented building spree in the last decade has left us with a glut of supply in the raw material sector that will, for most metals, take years to work through.
Maybe BCA’s long-term perspective is on the money. There is considerable evidence out there that we may not see a return to the high prices of 2010-11 for many years to come. Good news for consumers and for those designers so often challenged to find alternatives when prices spike to uneconomic levels.