With a Collapse in Commodity Prices, What Happens Next?
This has to be a scary time for virtually all commodities investors, whether one is talking about investing in commodities directly or in commodities companies. From oil to aluminum, nearly all commodities are not just trading near multi-year lows, but multi-decade lows. Bloomberg recently noted that commodities are now trading at the same level they were at in the mid-1990s after a major run-up in the late 1990’s and throughout much of the new millennium.
This begs the question: ‘what will it take for commodities to recover?’
To get to the answer, one first has to understand two important things about commodities prices in recent years. First, in recent years and up to the present, China has been consuming the vast majority of commodities. As economics website the Visual Capitalist showed in a stark chart recently, despite making up only 20 percent of the world’s population and less than 15 percent of global GDP, China consumes 60 percent of all concrete, 49 percent of all coal, 46 percent of all steel, and 54 percent of all aluminum among other commodities.
Related: Is Russia Plotting To Bring Down OPEC?
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The point here is that China’s infrastructure boom has had a massive and unparalleled effect on global commodities demand. So much so, that China was able to temporarily offset the second important point about commodities – they have largely been declining in price not just for the last few years, but for decades. In current dollar terms – that is, non-inflation adjusted terms, commodity prices have often risen over the last century, but in real terms have generally fallen substantially over time. The 2000’s led many investors to forget this trend as numerous commodities rose rapidly in price.
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