Commodities: New Facts & Fantasies
By Guy Isherwood
DRAMATIC CHANGES ARE underway for the global economy. Few past models remain valid for an economic order that is ever shifting eastward and becoming increasingly resource driven. Financial laws and economic theory are being re-written. In a recent special report, A New World Order: When Demand Overtakes Supply,1
economists at Société Générale made one
key observation: the last long cycle – which extended from the middle of the 1980s to the middle of the 2000s – was shaped by an environment that strongly favoured the development of the supply of goods. The next era, in all likelihood, will be dictated by demand issues.
And by demand, Société Générale are alluding to the scarcity of those things that make the world function: commodities. Their findings encapsulate this theorem: Beyond growth in demand for finished products, the most spectacular effect likely to be brought about by the stronger development of the emerging economies will be the enormous rise in demand for raw materials. This much many of us are all aware of. This is the very essence of why investors
around the globe have been drawn to the commodity complex. Once the preserve of niche specialists, an army of servants has propelled this marketplace to the fore. Even Joe Public understands the basics of the changes affecting the
supply of many essential natural resource products and wants to make sure that, at least, some part of his or her pension or other savings is locked into the long-term commodities story.
Physical Limits Having disappeared from the economic landscape in the last century, resource shortages are back. According to Société Générale this will create a particularly unstable environment in the long-term, some of the characteristics of which can already be anticipated (box below).
• A structural increase in the cost of raw materials • A rise in cycle frequency and magnitude • Capital costs rise & slowdown in productivity gains • State intervention and the regionalisation of trade • The return of inflation • Widespread increases in interest rates
New World Order: How Things Are Set to Change 1980/85 – 2000/05 Worldgrowthdriven by expansion of supply
Working Age Population: 2 billion +
Global Trade/ GDP: x2.8
Boomin production capacity, plentiful resources, government withdrawal from economic affairs
Hyper-competition, drop in real prices of raw materials, disinflation
Fall in interest rates,weak cyclicality Appetite for Risky Assets
Preferred Assets: Financial, Property, Bonds Source: Société Générale, July 2011 September 2011 31 2005/10 – 2025/30
Population of over-65s: 450 million +
Worldgrowthdriven by expansion of demand Emergingmarket
consumption: +100 to 200%
Boomin consumption, relative shortage of capital supply, limited resources, government intervention
Weakening competition, increase in commodity prices, inflation
Rise in interest rates, strong cyclicality LowAppetite for Risk
Preferred Assets: Industry, Land, Commodities
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