It is important to note that accentuated commodity boom supercycles that deviate greatly from their physical fundamentals are not possible without a permissive monetary environment. Indeed, supercycles have their origins in reflationary monetary conditions and are fueled by negative real interest rates or excess liquidity growth.
The fact that reflationary monetary measures were left in place for such a long time aggravated the problem, since they fueled a powerful debt-financed consumption and investment boom that eventually became unsustainable. The reflationary measures did succeed in igniting global recoveries in 2003 and 2009, but they also created new asset bubbles. In particular, they set the stage for the increasing “financialization” of commodity markets. Indeed, the growing participation of financial market investors in commodity trade likely contributed to the excessive rise in prices during the boom, worsening the subsequent bust.
For some commodities, such as iron ore and aluminum, abundant capacity will likely ensure downward pressure on prices for some years.
So the odds are that commodity prices will remain relatively flat, rather than recover strongly, for at least several years. Indeed, IHS believes commodity prices will not regain their early 2014 levels for the rest of this decade.
The economies that have benefited most from the lower prices are those that are primarily manufacturing or service oriented
only three major net commodity exporters that are advanced economies—Australia, Canada, and Norway. These three countries had benefited immensely from the booming commodity prices during the last decade and a half, but they are now facing a very challenging period of austerity that will likely last several years
The biggest losers at the end of the supercycle are the developing countries that earn most of their foreign exchange inflows from exports of energy and/or minerals—in other words, most countries in the Middle East, Africa, and South America, as well as some in Asia. The economic situation of these countries has already deteriorated rapidly since 2014, and their prospects are expected to remain negative as long as commodity prices remain depressed.
China’s ascension to the World Trade Organization (WTO) in December 2001 was a watershed event, without which the supercycle might not have been possible. At a minimum, the cycle’s amplitude and duration would probably have been far smaller. WTO membership not only boosted tremendously China’s exports to the rest of the world, but also attracted huge volumes of foreign direct investment (FDI) into the country’s manufacturing sectors. These, in turn, led to vast amounts of domestic capital being invested in precisely those industries that are intense users of energy and raw materials.
The domestic investment binge, which was easily financed by the Chinese people’s excessive savings, generated an insatiable appetite for energy and raw materials during the last decade. Indeed, not only did levels of physical consumption of commodities rise, but the rate of their growth accelerated as well. It was this acceleration that started to strain commodity markets and pushed prices progressively higher—far above previous nominal cyclical peaks. Commodity prices roughly doubled between 2002 and 2004. They doubled again between 2004 and early 2008, before crashing during the Great Recession’s global credit crunch.
