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Has the global economy entered a long period of persistently high, volatile commodity prices? That’s a question asked recently by international consultancy McKinsey & Co., which analyzed a century of data and found that the trend – for at least the next 20 years – doesn’t look good.
The previous 100 years told a different story. Since 1910, it found that the average combined price (inflation-adjusted) of food, agricultural raw materials, metals and energy reached its lowest historical level in the late 1990s.
Sure, there were big dips during the post-World War I depression and the Great Depression a decade later. But major technological advancements in areas such as exploration, extraction and cultivation allowed us during prosperous times to satisfy the demands of a growing global population, while keeping commodity prices at record lows.
“This ability to access progressively cheaper resources underpinned a 20-fold expansion of the world economy,” according to McKinsey’s analysis.
But that same analysis shows that the past decade has bucked a century-long trend. The commodity price decline achieved over the previous 90 years has, in just eight years, been completely wiped out, says McKinsey. Pre-WWI peak prices were surpassed in 2010, and all of this is happening during extremely trying economic times.
Shouldn’t commodity prices, like during past recessions and depressions, be falling?
Not this time around, the consultancy says. “Our analysis suggests that they will remain high and volatile for at least the next 20 years if current trends hold — barring a major macroeconomic shock — as global resource markets oscillate in response to surging global demand and inelastic supplies.”
There are many reasons why this time is different. Our world population surpassed seven billion in 2010 and of that, three billion will join the ranks of middle-class consumer over the next two decades, putting immense stress on those natural resources that give us energy, food, metals and fresh water.
McKinsey, which says we are entering a new era for commodities, throws out a few sobering stats: by 2030 the global vehicle fleet will double, per-capita calorie intake in India will jump 20 per cent, and Chinese consumption of meat — production of which is energy- and water-intensive — will rise 60 per cent.
Technology, no doubt, will continue to help us boost the supply of the commodities we have come to depend on, but the concern is that it can’t do it fast enough to meet rapidly growing demand.
Meanwhile, attempts to do so will require more expensive approaches and access to more remote locations — for example, drilling for oil in the Arctic — adding cost and putting more pressure on the fragile ecosystems we depend on.
For the rest of this column, please go to the Toronto Star website: http://www.thestar.com/business/article/1108328–high-commodity-prices-will-drive-innovation-in-industry