China Research

Commodity price indices had been in a broad decline in real terms since mid-1800s. The falling real price for commodities was the product of ongoing global economic development and demand growth, but also a positive commodity supply response and ongoing increases in productivity and innovation in the use of resources.

Oil prices were an obvious exception in 1970s, with two sharp upward oil price shocks – but oil prices then fell back to earth in the 1980s and 1990s.

What has changed? The principal difference has been the Chinese growth miracle since early 1980s, which has added a new source of global commodity demand beyond the normal growth pattern in industrial countries. Other emerging markets also caught the policy reform wave, saw their sustainable growth rates and incomes rise, and the demand for commodities followed in tandem.

The rise of the middle class in China and a growing number of other emerging markets was thus the core driver of increased commodity demand and in real prices (that is, with the impact of inflation removed) Since the early 2000s, there has been a structural upward shift in the global prices for energy, metals, food and related key inputs like fertilizer.

Recent global economic developments have had a negative feedback effect on many commodity prices. Global turbulence due to the ongoing euro crisis, the slow US recovery, and slower related economic growth in emerging markets has placed downward pressure on commodity prices as global demand slowed. However, although commodity prices in aggregate have declined over the past 18 months, they generally remain well above the levels of a decade ago. There are, of course, differences among the various commodities – pulp, iron ore and natural gas prices are all facing their own special downward forces.

But in general, each time there is a drop in perceived global economic risk, energy and key metals prices (like copper) rise again, which reinforces the strength of the underlying demand for resources from China and other major emerging markets. Commodity prices in aggregate may not return to the highs of 2007 any time soon, and they may even decline a bit in real terms going forward. But they are also unlikely to return to the historic downward path. Structurally higher commodity prices are the new normal, thanks to the rise of the middle class in China and many other emerging markets.

Glen Hodgson

Chief Economist, The Conference Board of Canada

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