Commodity Supercycle Slows Down in 2012
New Worldwatch Institute study examines the slowdown in the global commodities market
Mark Konold is Worldwatch's Caribbean Program Manager.
|Global Food Prices Continue to Rise|
|China's Presence Grows in Unconventional Gas and Oil Markets|
|BY MARK KONOLD | OCTOBER 1, 2013|
Global commodity prices dropped by 6 percent in 2012, a marked change from the dizzying growth during the “commodities supercycle” of 2002–12, when prices surged an average of 9.5 percent a year, or 150 percent over the 10-year period. This change of pace is largely attributed to China’s shift to less commodity-intensive growth. Yet while prices declined overall in 2012, some commodity categories—energy, food, and precious metals—continued their decade-long trend of price increases.
The commodities market consists of various raw materials and agricultural products with fluctuating value that are bought and sold in global exchanges. This includes agricultural products, such as corn, wheat, soybeans, and cotton; energy sources, such as crude oil and natural gas; metals used in construction, such as copper and aluminum; and precious metals that are often used for financial security, such as gold, silver, and platinum.
Commodity prices were generally in decline for decades before 2002. But as the number of rapidly growing emerging economies grew after 2000, urbanization led to a surge in demand. But that demand bumped up against a supply that was limited because of underinvestment in new capital expenditures as well as the difficulty of procuring new supplies due to stricter environmental regulations and deposits that were more remote. This opened the door to a dizzying climb in commodities prices over the next 10 years.
During the supercycle, the financial sector took advantage of the changing landscape, and the commodities market went from being little more than a banking service as an input to trading to being a full-fledged asset class—what some people refer to as “the financialization of commodities.” These days, large investment banks that participate in both the financial and commercial aspects of commodities trading dominate the landscape.
At the turn of the century, total commodity assets under management came to just over $10 billion. By 2008 that number had increased to $160 billion, although $57 billion of that left the market that year during the global financial crisis. The decline was short-lived, however, and by the end of the third quarter in 2012, the total commodity assets under management had reached a staggering $439 billion.
The widespread drought in 2012 had an adverse effect on many parts of the agricultural commodities landscape, with corn being hit the hardest. According to the International Monetary Fund, corn is the most vulnerable of crops to price shocks because stocks of the grain remain low. In 2011, corn yields stood at 147 bushels per acre, but in 2012 yields went as low as 122.6 bushels, a 17 percent drop. By year’s end that number had risen only slightly.
Further complicating price dynamics in the agricultural sector is a crop’s end use, especially whether it is used for food or biofuels. According to a 2011 report by the Farm Foundation, global corn use in the category “food, seed, and industrial” has expanded by 88 percent since the 2005–06 marketing year. Ethanol falls in this category. During this time in the United States use of corn increased by 2.23 billion bushels, and corn usage for ethanol increased by 2.46 billion bushels. The strong demand put upward pressure on corn prices and on the price of other commodities displaced by the expanded area devoted to corn production.
Throughout the commodities supercycle, the price of precious metals grew robustly. Although the rate of price increases for some precious metals slowed recently, gold maintained its momentum in 2012.
Stockpiling by owners was another reason for sustained metal prices in 2012. As the demand for metals declined at the start of the financial crisis in 2008, owners set aside inventory to prop up prices. In one year, metal inventories registered on the London Metal Exchange jumped by 313 percent. As a result, banks and trading companies began buying up warehouse space and storing surplus supplies, thereby inflating the prices of metals.
The slowdown in commodity price growth in 2012 was indeed notable, but it is still not clear if the supercycle is completely over. Prices are still much higher than they were in 2002, but the dramatic slowdown in Chinese demand has investors abandoning these markets.
By the end of April 2013, the commodities markets saw a loss of $63 billion, and Barclays Bank claimed that total commodity assets under management had dropped to their lowest level in three years. It is going to take a little more time to find out whether the commodities market has permanently cooled, reverses dramatically, or picks up and resumes its blistering pace.
Further highlights from the report: