Commodity prices remain high, and Dambisa Moyo says we better get used to it. Moyo, author of Winner Take All: China’s Race for Resources and What it Means for the World , has a piece at Project Syndicate in which she outlines how long term factors will continue to drive commodity prices. One key factor: the rise of emerging economies and their growing hunger for oil, copper, iron, and other commodities: Worst-case estimates have China’s real GDP growing at around 7% per year over the next decade. Meanwhile, the supply of most commodities is forecast to grow by no more than 2% annually in real terms. All else being equal, unless China’s commodity intensity, defined as the amount of a commodity consumed to generate a unit of output, falls dramatically, its demand for commodities will be greater this year than it was last year. As long as China’s commodity demand grows at a higher rate than global supply, prices will rise. And the rapid economic growth that China’s leaders must sustain in order to lift enormous numbers of people out of poverty – and thus prevent a crisis of legitimacy – places a floor under global food, energy, and mineral prices. To be sure, intensity of use has fallen for some commodities, like gold and nuclear energy; but for others, such as aluminum and coal, it has risen since 2000 or, as is the case for copper and oil, declines have slowed markedly or stalled at high levels. As the composition of China’s economy continues to shift from investment to consumption, demand for commodity-intensive consumer durables – cars, mobile phones, indoor plumbing, computers, and televisions – will rise. There is also the issue of the so-called reserve price (the highest price a buyer is willing to pay for a good or service). The reserve price places a cap on how high commodity prices will go, as it is the price at which demand destruction occurs (consumers are no longer willing or able to purchase the good or service). For many commodities, such as oil, the reserve price is higher in emerging countries than in developed economies. One explanation for the difference is accelerating wage growth across developing regions, which is raising commodity demand, whereas stagnating wages in developed markets are causing the reserve price to decline. By implication, if nothing else, global energy, food, and mineral prices will continue to be buoyed by seemingly insatiable emerging-market demand, which commands much higher reserve prices. Read Commodities on the Rise here .
Filed under: emerging economies, inflation, oil prices, China, commodities, project syndicate, crude oil, fundamentals, consumers in China, Dambisa Moyo, reserve price, Winner Take All