economy’s growth typically becomes more ‘commodity intensive’ when it reaches per capita GDP of around $3,000 (in constant purchasing power parity 2011 dollars). At that point demand for commodities typically takes off.
Conversely, we find that commodity demand tapers when economies reach per capita GDP of around $20,000.
Our work suggests prices will remain as much as 30-60 per cent higher in real terms than during the last decades of the 20th century, which we think will be the ‘new normal’.
economic development in emerging markets to support commodities
August 22, 2012 7:30 am by beyondbrics
By Paul Bloxham and Andrew Keen of HSBC
Commodity prices have fallen this year, after rising for most of the past decade. This has made resource producers nervous about the prospect that prices could fall significantly further, perhaps even back to the very low levels reached in the 1980s and 1990s.
But we think big falls in commodity prices are unlikely. Unlike in the late 20th century, the emerging rather than developed economies are now the main drivers of global growth: these countries require significant amounts of commodities to grow as they shift from agricultural to industrial and urban economies, which involves building infrastructure and housing.
Estimating this more formally in a recent report, we find that an economy’s growth typically becomes more ‘commodity intensive’ when it reaches per capita GDP of around $3,000 (in constant purchasing power parity 2011 dollars). At that point demand for commodities typically takes off. Conversely, we find that commodity demand tapers when economies reach per capita GDP of around $20,000.
What is remarkable about the past decade is the unprecedented share of the global population that is now at the commodity-intensive stage of development. The bulk of the world’s population resides in countries now at this stage of development.
We estimate around 44 per cent of global output is now accounted for by commodity-intensive economies, up from only 22 per cent at the turn of the century.
Importantly, these commodity-intensive economies now also account for the bulk of global growth and have done so since the early 2000s. During the past decade, seven more economies have become commodity intensive, the largest of which are China, India, the Philippines and Vietnam.
We think that commodity prices have been high in recent years largely because far more of the global economy and population is now at the stage of development where they need commodities for their economies to grow than during the 1980s and 1990s.
Indeed, historical comparisons reveal that real commodity prices were unusually low in the 1980s and 1990s, rather than being unusually high now. Real commodity prices are currently at similar levels to those maintained for the most of the first half of the 20th century.
What is also telling about the 1980s and 1990s is that the composition of global growth was unusual as it was being driven by a small group of countries with already high levels of development and large service sectors. With very little contribution from countries at the commodity-intensive stage of development it should be no surprise that industrial commodities were not in high demand in the latter decades of the 20th century, and thus prices were low.
But it is not just the demand side that matters, developments on the supply side are also expected to keep prices elevated.
Despite significant investment in capacity, resource supply has been slow to increase in recent years. This reflects a number of factors, including the slow response of resources companies to the new demand conditions and the disruption caused by the global financial crisis in 2008/09. The early years of the commodity price upswing saw excess cash generation from high commodity prices directed towards acquisitions and capital return rather than investing in new capacity.
This situation is now reversing, seven years into the upswing, and capital spending in the mining industry has surged, although we do believe it is likely to peak in 2012. Much like during the global financial crisis, however, current economic concerns are leading to renewed caution and because the industry has already pursued many of its best projects, approval for the next generation of mines is likely to be more difficult.
Of course the supply conditions differ across commodities. We expect to see divergence between those where barriers to entry for Chinese producers are low (processing industries such as steel and aluminium, and some mined commodities such as zinc), and those where geology demands that production growth will have to come from non-Chinese sources (notably copper and iron ore), in locations that have higher costs and political risk.
Looking beyond the current short-run growth issues in both China and the West, we see the longer-term structural boost to demand for commodities lasting until at least the next decade. This will mean some commodity industries will have to continue to attract new investment to supply this growth and the cost of these projects is likely to be higher than in the past.
Our work suggests prices will remain as much as 30-60 per cent higher in real terms than during the last decades of the 20th century, which we think will be the ‘new normal’.
Of course the long historical view reminds us that this may, in fact, just be normal.
Paul Bloxham is chief economist for Australia and New Zealand at HSBC, and Andrew Keen is global head of metals and mining research at the bank. |
