INTRODUCTION
the economic outlook. “If you add This impact can be seen if you look, for example, at import prices
together Russia and India as well [as of non-fuel commodities into the advanced economies. Five or six
China], you get over half of global years ago these prices were declining – a dis-inflationary force. Over
growth coming from these emerging the past three years they have been increasing as there is more dis-
market countries,” according to Charles persed demand, less spare capacity, and less competition and/or lit-
Collyns who prepares the IMF’s World tle room for substitution in these markets. This has now become an
Economic Outlook.
2
increasing source of upward pressure on inflation. For example, Latin
More importantly, strong increases in America is poised to enjoy exceptionally high prices for its exports
emerging market consumption are tak- during the next 5-10 years given the growing demand for commodi-
ing place, such as Chinese retail sales
growing 16% y-o-y in June. This is a wel-
Movements in wider markets will continue to direct
come sign as it shows that some
investor sentiment towards commodities
progress is now being made towards
increasing household consumption, ties from Asia, according to a report from the United Nations
which, over time, should help to lead to a Economic Commission for Latin America and the Caribbean (Cepal).
rebalancing of China’s economy – and We are all aware that current, and potentially systemic, events
global imbalances overall. enveloping the financial system remain a threat to world growth.
For the first time, the largest contribu- However, unless they unhinge commodities demand, this stronger
tion to global growth will now be made global growth will benefit market conditions.
by China, according to the IMF – con- To some extent, all commodity prices have been pushed up by
tributing the largest part to the strong growth of domestic demand around the world – a force likely
increase in global growth measured at to continue into 2008. However, there will be improved supply condi-
market exchange rates, as well as in tions next year. Perhaps with more normal harvests, increased food
purchasing power parity terms.
3
supplies will help dampen food prices. Metal prices could also ease as
The IMF also downgraded its project- a result of increasing mining capacity in response to high metal
ed growth in the US to around 2% this prices – although recent metals trade data from China provide reas-
year. Others have gone lower. Mark surance that fundamental trends remain firm, for now. “The combi-
Matthews, Chief Asian Strategist for nation of [these] factors explains why we’re expecting a decline in
Merrill Lynch, recently lowered his [commodity] prices next year,” say the IMF.
growth forecast for the US economy Movements in wider financial markets will continue to direct
from 2.3% to 1.6%. But whatever your investor sentiment towards the commodities complex. The dangers
viewpoint, the export performance of of a crisis beyond today’s bad debt and liquidity problem are obvi-
the US has been strong and should be ous. If the current sell-off spills over from stocks into the wider array
supported by the continuing deprecia- of other assets it will become much harder to contain. There is no
tion of the dollar seen in recent months. doubt that there are quite a few more surprises (read massive loss-
es) to come.
Commodities Inflation If the bad debt/liquidity dust settles, contagion (we are told) can
Commodity markets have been an be avoided. And as one commentator recently suggested, “A few
important source of upward pressure months from now this will all blow over and we will wonder what the
on inflation. While accustomed to noise was all about – as is the case with all corrections.” This is wish-
upward pressure coming from energy ful thinking at its best. If correct, we are in for some strong commod-
prices, what we are now seeing is ity price rebounds and advances.
upward pressure from food prices – More likely, however, a necessary and fundamental change in lend-
particularly important for emerging ing and borrowing criteria will emerge. Whatever happens, unlike so
market countries where food prices much else in the plethora of investment vehicles available today,
constitute a much larger portion (35- real, tangible, consumable, depleting commodity assets provide
40%) of consumption. investors with what we could refer to as a ‘L’Oréal exposure’ –
The combination of rising global because they’re intrinsically worth it. And when your pension fund
demand for food (and bad weather) becomes worth one hundredweight of beans and the government
has contributed to increases in food has nationalised the banks (and their lending books) to avoid mass
prices. There is also the spill-over from homelessness, you’ll probably still want a cup of coffee in the morn-
the energy market as increasing ing. Because you’re worth it too
•
demand for biofuels has affected not
Footnotes:
just the prices of grains but also dairy 1. Hold tight: a bumpy credit ride is only just beginning. Financial Times, August 16
th
,
and other products. “So we’re seeing
page 9.
2. Press Briefing on the Release of the Updates to the April 2007 World Economic
this upward pressure very generally on
Outlook and the Global Financial Stability Report, Washington, D.C., July 25
th
2007.
commodity prices, which is particularly
3. On purchasing power parity terms, China represents 15% of the global economy.
affecting the emerging market in devel-
However, evaluated at market exchange rates, China is only 5% of the global
economy, and therefore, its contribution to global growth measured in using market
oping countries,” says Collyns. exchange rates is substantially less.
8 SEPTEMBER 2007 COMMODITIES NOW
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