by Dambisa Moyo, author, most recently, of Winner Take All: China’s Race for Resources and What it Means for the World, via Project Syndicate
SEOUL – The commodity super-cycle – in which commodity prices reach ever-higher highs, and fall only to higher lows – is not over. Despite the euphoria around shale gas – indeed, despite weak global growth – commodity prices have risen by as much as 150% in the aftermath of the financial crisis. In the medium term, this trend will continue to pose an inflation risk and undermine living standards worldwide. For starters, there is the convergence argument.
via Project Syndicate:
• As China grows, its increasing size, wealth, and urbanization will continue to stoke demand for energy, grains, minerals, and other resources.
• the US consumes more than nine times as much oil as China on a per capita basis. As more of China’s population converges to Western standards of consumption, demand for commodities – and thus their prices – will remain on an upward trajectory.
• although the case for copper seems straightforward, given that it is a key input for wiring, electronics, and indoor plumbing, a strong bid for iron is not as obvious, given the Chinese infrastructure boom that already has occurred in the last two decades.
• unless China’s commodity intensity, defined as the amount of a commodity consumed to generate a unit of output, falls dramatically, its demand for commodities will be greater this year than it was last year.
• As long as China’s commodity demand grows at a higher rate than global supply, prices will rise.
• China's need to prevent a crisis of legitimacy – places a floor under global food, energy, and mineral prices.
• As the composition of China’s economy continues to shift from investment to consumption, demand for commodity-intensive consumer durables – cars, mobile phones, indoor plumbing, computers, and televisions – will rise.
• By implication, if nothing else, global energy, food, and mineral prices will continue to be buoyed by seemingly insatiable emerging-market demand, which commands much higher reserve prices.
• If people feel rich and enjoy growing wages and appreciating assets, they are less inclined to cannibalize other spending when commodity consumption becomes more expensive. They just pay more and carry on.
• Supply side challenges - It is not just that global supplies of resources are increasingly scarce, but also that supplies are increasingly falling into inefficient hands.
• Around the world, governments are taking greater control of resources and imposing policies that hamper global production and ultimately force prices higher.
• There is a perennial temptation to focus on – even to overemphasize – the short-term, tactical drivers of commodity-price movements, at the expense of giving longer-term, structural factors their due.
• While short-term factors – for example, political instability, weather-related disruptions, and speculative activity – are important determinants of prices, they tell only part of the story.
• In practical terms, this means that oil prices, for example, are more likely to hover near $120 per barrel over the next decade, rather than $50; and we are unlikely to see a $20 barrel of oil ever again.
Copyright © Project Syndicate
