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Are high commodity prices behind us?
Mon, 17 Nov Pre-Open

Let us rewind the clock back to 2011. Commodity prices were at record highs. Nearly every commodity in the energy, industrial metals, precious metals and agri spaces were trading at all time highs. Gold prices were close to US$ 2,000 an ounce. Soaring crude prices had put enormous pressure on the Indian economy. It fueled inflation and put a lot of strain on the government's finances which was handing out petroleum subsidies in ever increasing quantities.

Now fast forward to the present. Commodity prices have fallen sharply across the board. In fact, commodities like Oil and Gold are so far off their peaks that people have started to believe that prices may now be in a structural bear market. We believe there is some truth to this argument. Allow us to explain.

Commodity prices tend to move in cycles. However, these cycles last for several years. This is because it takes many years for companies in mining and energy sectors to build up capacity. Once these investments are in place, incremental investments will only lead to an oversupply situation. This will tend to drive down prices. The process which drove up prices, works in reverse and commodity prices remain depressed for years until demand picks up again. This boom bust cycle has been tracked by economists over decades. These multi-year price moves in commodity prices are termed as super-cycles. The last one ended in 2011.

So for how long is the down trend going to last? Well it quite possible that commodity prices may remain subdued for at least a few more years. After all, demand from China is slowing down and the developed world is in a structural decline. Without robust demand, the bull market in commodities seems to be well and truly over. Until the global demand-supply situation evens out, commodity prices will remain under pressure we believe.

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