ANALYSIS
NEWS
04
|
THE INVESTOR
COMMODITIES
DOUBLE-EDGED EFFECT OF PRICE DROPS
Just a few years ago the talk was of a commodity ‘supercycle’. Prices
of materials – from oil to platinum – would be ‘stronger for longer’
as growth in emerging markets such as China and India led to the
emergence of a new middle class, eager to splash out on consumer
durables, cars and designer clothes – all of which require a range
of raw materials in their production.
Now that China’s growth engine is faltering, as we explain on
page 14, commodities have proved just as vulnerable to general
economic conditions as they always have been. The prices of many
commodities have been falling steadily; the oil price has halved while
metals like lead, copper and steel are well down on the year. That
presents a challenge for commodity companies and traders, many
of whom are now looking for ways to rein in their investment plans
and to cut costs. For much of the rest of the economy, however,
the lower cost of basic materials may be good news.
The fall in the oil price, in particular, is a key reason for the low
inflation in the UK and other leading economies – in the UK, petrol
prices have fallen to around their lowest level in five years which, by
reducing the cost of transporting goods, should act as a further
depressant on inflation. Inflation is also low across Europe, the US
and emerging markets such as China and Australia.
Of course, anyone who has studied the recent performance of Japan
will know that, if low inflation tilts into outright deflation and persists
for a long period, it can lead to economic stagnation. That is a risk
policymakers here and in Europe are well aware of and which their
policies are designed to avoid. In the short term, however, falling prices
can act as an economic stimulus, encouraging consumers to buy more,
attracted by lower costs. That could eventually give a fillip to China as
its leaders continue their strategy of moving from an export-led,
investment-heavy economy to one based more on domestic demand.
The fall in the oil price
is a key reason for the
low inflation in the
UK and other leading
economies
