The last decade has seen commodity prices rising to unprecedented levels at a rate previously unknown due to the increased demand of consumer goods in both the developed world and especially in emerging markets such as India and China. However, with the slowdown in the global economy, consumer demand has fallen and China has signaled that it wants to shift away from exports and towards promoting internal demand.  Analysts now predict that this very commodity-intensive phase of China’s development has ended. As far as commodity prices are concerned, falling demand is likely to reduce prices over the long run.

 For instance, most economists agree that the increase in Crude Oil prices from below $50, less than a decade back, to above $100, after 2008, was as a result of demand outpacing supply. As consumer demand for motor vehicles are expected to rapidly increase in the emerging markets it is likely that oil consumption will continue to increase. However, as emerging markets shift away from heavy industrialization, prices of commodities such as copper are likely to fall. Signs indicating a slowdown in Chinese manufacturing have already caused copper prices to fall by 13 % over the past three months.

Countries such as Australia, Brazil and Russia have experienced huge profits thanks to rising commodity prices. However, this has also led to an increase in mining operations. Thus, the world supply of industrial commodities is much larger than it was a decade back. Prices had continued to rise because demand for these commodities rose at a much higher rate than supply could increase. With slowing industrial growth, supply has slowly caught up. Most mining corporations have realized this and have cut back on expansion plans. The world’s largest miner BHP Billiton recently announced that it has pulled back on their $80 billion expansion project.

Analysts studying the historical prices of commodities over 200 years claim a repeated trend of two-decade price decline followed by one decade of price gains. Thus, if these analysts are to be believed, the trend for commodity price is clearly downwards. However, even if their analysis is to be believed, these trends are very long term and the recent fall in commodity prices does not guarantee the start of this trend. As of now, it is important to keep an eye of China and see if the dip in production is temporary or not.

Note: The blog is just an expression of the author’s opinion and cannot be deemed responsible for any losses incurred.