The recovery of commodities
Back in 2000, prices of commodities hit historically cheap levels. Take zinc. When you adjust its price for inflation, it was actually trading at a 60 year low.
Thanks to years of under investment following the bear markets in the 1980s and 1990s, many commodities were in short supply. But then Asia started to demand more and more commodities.
China and the rest of Asia began urbanisation and industrialisation. The growing middle class in the continent was at the heart of this revolution.
The importance of China to commodities
China led the way in its consumption of commodities. Between 2002 and 2005, China accounted for more than half of the world’s copper consumption. With nickel and tin, it was even higher than this, with demand growing 87% and 86% respectively.
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This also benefitted the oil price as demand led to prices rocketing,
But then the financial crisis hit. This wiped out the voracious demand that existed up until then. China is now building and consuming far less than it was before and this hit commodity prices. This alongside struggling growth across much of the world wasn’t good news for raw materials.
After the start of the 2000s, money was pouring into the production of commodities and new innovations meant more efficient use. With the lag effect that comes with this, supply became plentiful as demand began to taper.
And this year, commodities have continued to fall in price. If you look at the Bloomberg Commodity Index, you’ll see it’s trading at a 12 year low.
But commodities are cyclical. And at some stage, the market should recover again. This doesn’t mean there aren’t opportunities in the sector, as you can see from this article, but until demand picks up, they’re certainly not out of the woods yet.
So there you have it. Why the commodities super cycle is over for now.
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