I'm hearing conflicting news in the press; some argue that the commodities boom is starting to run out of puff, while others tell us that we are only mid-way through - and that there could be a good five to ten years left. What do you think and why? Before examining some of the factors influencing global commodities trends it must be noted that it is the belief of many, including myself, that we are currently in a ‘Super Cycle' that will see a general upwards trend in commodity prices that will last for at least a decade. We may see short-term corrections in some commodities but we still have some substantial growth ahead. The simple fact is that demand will continue to grow for the earth's resources, many of which are finite
There are several factors that impact directly on the price of commodities. The first and most influential is the fact that demand is fuelled by the rapid growth of developing economies. The growth of developing economies is only strengthening, placing further upward pressure on commodities prices, and although we may see a softening as the US potentially enters a period of mild recession, the growth of the BRIC (Brazil, Russia, India and China) economies and subsequent demand for soft and hard commodities will continue.
For example, India is currently constructing over 55,000kms of new motorways and it takes considerable resources to build this infrastructure. Presumably the Indian population will want to drive motor vehicles on these new roads and this all adds to the demand for energy resources. Similarly, a city the size of Brisbane is being constructed every month in China and a coal powered energy plant is opening every week. Demand has never been stronger and it will not abate anytime soon.
To put demand from this region into perspective, the US and Asia consume approximately the same amount of crude oil every day, yet the US has only a mere fraction of Asia's population (approximately 10%). So given the weight of its population, the strong demand for resources will escalate if economic growth and development in the Asian region continues at its frantic pace. Geopolitical tensions are another major factor influencing commodities markets given that many companies producing commodities around the world are owned or directly regulated by their respective governments. Turmoil, whether real or speculative, puts upward pressure on commodity prices as it creates uncertainty in supply from that region. Unfortunately, it appears to be true that the world isn't becoming any safer or more peaceful and ongoing conflict will continue to place upward pressure on the price of commodities.
The increased demand (and limited supply) for energy resources in conjunction with a focus on the environmental impacts associated with the burning of non-renewable fuels has seen a move towards developing alternative ‘green' energy sources. The focus on the development of biofuels such as ethanol, which uses sugar and corn in its production are also placing upwards pressure on the prices of these commodities.
Soft commodities such as coffee, livestock and other agricultural products are also in demand to support the growing populations and changing dietary habits of developing economies and to service the increasing demands of established economies. The Chinese, for example, are increasingly drinking coffee (Starbucks plans to open 5000 stores there). Think about what impact an extra 1 billion people enjoying a morning coffee will have on demand.
Overall, I'm not alone in believing that the commodities boom will not abate in the near future and that we are only now in the early stages of a continuing upward trend in demand (and prices). Global conflct and the industrialisation of developing countries are just some of the factors that will stimulate demand for commodities over the coming years.
By CompareShares.com.au - for more articles like this click here. CompareShares.com.au is Australia's pre-eminent news and investing site for investors and traders, covering shares, superannuation, property, financial planning strategies and more.
21st-May-2008 | 
