Commodity price uncertainties
Current softening of prices need not last long
Several factors ranging from disappointing growth numbers coming out of trans-Atlantic economies to China’s slower-than-expected growth rate seem to have contributed to a tapering off of commodity prices in the past year. Several commodities, especially metals, witnessed some 5-10 per cent decline in prices this month, compared to their October levels. The trigger for this weakening came from China which has, over a period, emerged as a dominant player in the international commodities market, both as a buyer and a seller. In the past month, there has been a perceptible drop in Chinese import, as well as export, of most commodities. China’s battle against inflation may have also contributed to this. Apart from increasing the banks’ reserve requirements to tighten money supply, China has taken a slew of other measures recently with the objective of boosting agricultural production, increasing supplies of farm produce and energy, and strengthening market supervision to keep domestic prices under control. These factors coupled with a weak dollar and an uncertain euro have further dampened sentiment in commodity markets. However, it is not clear how long this trend will persist. Even a modest revival in growth and consumption in the US, especially in winter, can send fuel prices rising.
A defining feature of the 2006-2008 price spike was that it simultaneously involved all the three main commodity groups — energy, agriculture and metals. This does not happen often. The commodity price spurt was attributed largely to factors such as rise in energy prices; supply constraints in the wake of a demand surge and fall in agricultural production due to adverse weather conditions; diversion of cereals and vegetable oils to biofuel production; and growth in demand for manufactured items and high-value foods from a burgeoning middle class in emerging Asia. Though commodity prices began to soften from 2009 onwards, this was neither across the board in all commodity groups, nor could it be sustained for long. Many agricultural product prices began rising in mid-2010 partly due to erratic weather, which caused widespread floods and consequential crop losses in many countries, and partly because some countries had imposed export restrictions on farm goods in the wake of domestic inflationary pressures. Panic buying by some deficit countries only aggravated the situation. While such market-distorting policies and actions do have a bearing on prices, demand-supply imbalances are at the root of all price spikes. Typically, the fall in commodity prices is usually faster than the rise. Price fluctuations are unavoidable also because neither demand nor supply is always predictable. The fact also is that price volatility is exacerbated by the innate imperfections in the commodity markets. All this makes commodity price trends difficult to predict over medium and long term. The sufferers from this uncertainty are usually the developing countries, most of which rely heavily on export earnings from some commodities to be able to import the others that they are short of.