Is the global boom in commodity prices finally over? – by Linda Yueh (BBC News – July 2, 2013)

http://www.bbc.co.uk/

Like Graham Greene’s The End of the Affair, it is hard to believe it is over and let go. But, it has been an extraordinary run, a decade of what has been called the commodity super-cycle.

It started, and perhaps will end, with China. The global integration of an economy that has grown at double digits since China joined the World Trade Organization (WTO) in December 2001 perhaps marked the start. Will China also now mark the end?

Until the last decade, the real price – so, taking off inflation – of commodities had fallen for 150 years. It was the reason why developing countries wished to diversify out of natural resources and into manufacturing.

Because agriculture prices fall over time, countries like Brazil, where more than 90% of exports were coffee during the immediate post-war period, would experience worsening incomes. This is why.

While prices of its exports would fall over time, imports became relatively more expensive. So, the country’s terms of trade (export prices relative to import prices) would fall, leading to worsening incomes for the country.

So, during the 1950s and 1960s, Brazil diversified and reduced coffee to less than 10% of its exports.

Coming to an end?
But, it changed during the past decade such that Brazil, Australia and Canada, along with other countries, found themselves exporting more commodities as China and to a lesser extent other industrialising Asian countries began to demand them.

Prices were driven up and peaked in 2008, even while the US and parts of Western Europe underwent the worst recession in a century. And the commodity boom perhaps even helped Australia to be the sole G10 major economy to avoid a technical recession during the global financial crisis.

What has driven that boom, though, may be coming to an end or at least a levelling off. It is difficult to say what part of the extraordinary rise in commodity prices is due to China.

Some economists estimate that it could be as much as 50%. Others are more dubious. But, with China accounting for over 40% of demand of the world’s iron ore, copper, and other metals, it is clearly a significant factor.

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