Commodity Booms since World War 2

Posted By Robert On Saturday, August 23rd, 2014 With 0 Comments

This article is brought to you by us – it assumes knowledge of our other Article ‘What affects Commodity prices?’.

What are Commodity Booms?

Commodity Booms are defined for the purpose of the present analysis as sharp simultaneous increases in the real price of a broad group of commodities.  Using this definition it is possible to detect three commodity booms since the second world war, beginning in 1950, 1973 and 2003.

Commodity Boom

All of these commodity booms was triggered by demand shocks caused by exceedingly fast macroeconomics expansion. In all three cases, commodity producers were unable to satisfy the fast growth in demand and prices exploded in consequence.

The fact that demand is the typical cause of broad commodity price moves should not come as a surprise, even if analysts have attempted alternative explanations.

After-all, alterations in supply are specific to individual commodities. Booming or slumping macroeconomic conditions will impact on demand across most commodity groups. We can think of two exceptions to this general rule.

The first is widespread crop failures caused by extreme weather events. The second is strong simultaneous additions to production capacity stimulated by a period of high prices.

The years marking the beginning of the respective commodity booms were characterized by very high growth rates in GDP (Growth Domestic Product) and industrial production.

It is also noteworthy that the commodity booms collapsed in 1952 and 1974, as the world economy experienced sharp economic deceleration and commodity demand shrank in consequence.

The commodity booms that began in 2003 is persevering for much longer than its predecessors, all while the global economy continues to expand at a very fast pace.

The first of the Commodity Booms

The first of the commodity booms was strongly related to the Korean War, which broke out in 1950. The direct impact of the war on commodity markets arose from the insecurity felt about industrial materials supply, amplified by the painful shortages of the second World War fresh in memory.

This prompted a widespread build-up of strategic inventories, which added to demand and pushed prices up. The indirect impact arose from the boost to economic growth and industrial output that resulted from the war operations.

Agricultural raw materials and to a lesser extent, metals and minerals carried the first commodity boom. In contrast, the war and the macroeconomic spurt of the years had little impact on the prices of energy and food. An important explanation to these weak reactions was that the major consuming countries were relatively self-sufficient in energy and food.

By the second quarter of 1952, the price increases had petered out as it became clear that the Korean War would not spread into a worldwide conflict and with the sharp slowdown in economic growth recorded in that year. In addition, dramatic strategic de-stocking added to supply and so contributed to the ensuing price weakness.

By the end of 1952, the only remaining real impact of the commodity booms was a metals and minerals price level 20-30% higher than in 1949. For all practical purposes, the boom was a transient phenomenon.

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The second of the commodity booms

The second of the commodity booms was much stronger than the first. The prices of all commodity groups rose sharply. As in the first boom, a very strong macroeconomic performance during 1972 and 1973 constituted an important trigger to the booming commodity prices.

However, there was two additional triggers. One was that the boom had been preceded by two consequential years of widespread crop failures. The scarcity of food led to substitution in land use e.g from cotton or jute to grains, which cut the agricultural raw materials supply.

The speculative demand for commodity inventories as a “safe” store of value was a further factor to the commodity boom, as investors fled from the chaos of the time in the markets for currencies, shares and bonds.

Commodity Boom

The third of the commodity booms

This commodity boom started in 2003 and has not yet run its course as this article is being written in early 2014. Like the preceding commodity booms it was triggered by a demand shock.

This can be illustrated by the demand increases for oil and copper in 2004, the highest on record for over twenty years.  Producers were caught unaware, with little spare production capacity, so prices in many market exploded.

As in the earlier commodity booms, the demand shock was importantly due to fast macroeconomic expansion, the growth performance in developing Asia.

China stands out for having a key role in Asian development. The country’s impressive growth in 2002-2006 has been importantly driven by construction, a sector that is a heavy user of metals and energy.

It is important to note that not all events of sharply accelerating macroeconomics performance give rise to booming prices in commodity markets. Other preconditions have to prevail, e.g a tight production capacity situation and relatively small inventories.

Such preconditions typically emerge after prolonged periods of weak commodity expansion and instil a sense that supply is secure – and there is limited need for inventory holding.

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