Commodity super cycle turning downward, says RBI

In latest commodity super-cycle, inflation-adjusted prices of commodities rose 60-500% between 1999 and 2010

The Reserve Bank of India (RBI) has said global commodities prices have already touched inflexion points and are now on a downward path. The central bank’s statement is based on data on commodity prices, both energy and non-energy, for the past five decades.

“Since 1894, four super cycles have been identified, with the last starting in the late 1990s and attributed to rapid and sustained industrialisation and urbanisation in China and other emerging economies,” RBI said.

In the latest commodity super cycle, inflation adjusted prices of commodities rose 60-500 per cent between 1999 and 2010. Oil price rose 467 per cent, metals 202 per cent and the prices of agricultural commodities 77 per cent, the steepest price increases among the four commodity super cycles (after adjusting for inflation).

Nic Brown, head (commodities research) at London-based Natixis, said, “We agree the weak global growth is one of the key characteristics behind the relative weakness in commodity prices through the past few years.”

According to RBI, the recent super cycle had another characteristic trait — a high correlation between commodity prices and high price volatility.

“While commodity producers have invested heavily in new capacity for what was expected to be rapid global growth, the underperformance of economies such as China (relative to expectations) has resulted in global surpluses, which are now helping depress prices. In part, this reflects Chinese policy changes, designed to curb overcapacity, address pollution and encourage profit maximisation (previous policies advocated growth at any cost). This structural change is particularly evident in raw material markets such as those for coal and iron ore,” Nic said.

Given the pace of innovation and physical investment, supply-side costs are rising due to the depletion of resources, while emerging market economies are expected to grow without any drastic reversal of commodity demand. In fact, commodity prices have occasionally shown signs of reviving more quickly than global economic activity. The global economy might be entering a phase of stable but secularly lower levels of growth, keeping commodity prices stable and higher than the level before the current super cycle began.

On oil prices, Nic says, “It is more of a special case, as the OPEC (Organization of the Petroleum Exporting Countries) cartel aims to maintain stable prices by balancing supply and demand in the global market. For now, the oil market is oversupplied, but we expect OPEC to take action to address this issue before the onset of the seasonally weak demand period in the first half of 2015.”

RBI concludes that, "asymmetric Christiano and Fitzgerald band pass filters commonly used to identify commodity super cycles show that both real energy prices and real non- energy prices have already reached inflexion points and are turning onto on a downward phase."