Rio Tinto And Vale Killed The Commodities Supercycle, Not China Or The Fed – by Tim Worstall (Forbes Magazine – November 29, 2015)

That the commodities supercycle is over is obvious: we can see that just by looking at the falling values of pretty much all of the commodities. However, there’s a number of implications of this being bandied about which are wrong.

It’s not, for example, slowing growth in China which has killed it, nor will it be the Federal Reserve raising interest rates which gives it the final death blow. It’s much more accurate to say that the producing companies, like say Rio Tinto or Vale in iron ore, which have killed off the cycle.

And as a result of that we can’t quite say that falling commodity prices are symptoms of the global economy about to fall over into depression.

The complication here is as Scott Sumner always says: don’t try to reason from a price change. At least, not until you work out why the price has changed. Yes, we’ve got falling commodity prices, yes that supercycle appears to be over.

Yet that doesn’t then mean that the global economy itself is in trouble. Because prices are set not by demand, but by the balance of supply and demand. And as such prices can fall if supply increases just as much as they can if demand falls.

Indeed, looking just at demand (or solely at supply, equally) doesn’t tell us anything at all about which way prices are going to go. A fall in demand can be accompanied by a fall, rise or no change in price. It matters what is happening to supply at the same time.

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