Commodity Supercycle: A “myth” explained Manuel Riesco

In the Financial Times of 31 August 2015, a piece entitled “Why the commodities super cycle was a myth” concludes that “falling prices show the world is not running out of resources”. It is rather the case that falling prices show that speculative capital is flowing out of commodities, as advanced economies start to recover – in however sputtering a manner – from the secular crisis that began in 2000.

In recent weeks, the copper price has fallen under 2.3 dollars per pound, exactly half its historical maximum reached at the beginning of 2011. Pitifully, if the world economy repeats its historical trajectory, which won’t be identical to the past for sure but probably not very different this time either, it is to be expected that during the next quinquennium the copper price “supercycle” will continue oscillating downwards until it falls consistently below its historical average of two dollars per pound. This coincides with a surprisingly horizontal long term trend since 1935, as technological advance seems to compensate increasing scarcity. Then the price should continue falling until it reaches its minimum historical levels of one dollar per pound during the next quinquennium, before it recovers its long term upward trend.

Copper does not move alone, because the 14 main commodities led by oil and gas, have followed almost exactly the same long run trajectory in the past, all of them swimming against the current, following trajectories that almost exactly mirror the opposite behaviour of advanced economies! The prices of the former shot up when the latter weathered turbulence and secular crisis during the 1970s and 2000s. On the contrary, prices fell and floored when advanced economies recovered and experienced secular booms during the 1980s and 1990s, and now prices fall once again when, at long last, developed economies seem to be initiating again a long term upward trend, however bumpy, after a decade and a half of the secular crisis initiated in 2000.

To understand this contrarian behaviour of commodity prices, it seems useful to return to the basics of natural resources economics: their supply is subject to restrictions and cannot adjust with elasticity to the constant changes in demand, as is the case with normal industrial products and services. For this reason the prices of the latter are determined exclusively by supply, and tend to equal average production costs that move smoothly downwards with technological advances. Commodity prices, by contrast, are determined exclusively by demand, and change every day, every minute, every second and millisecond. For this reason, they are a magnet for speculators; and so the demand for commodities has two components: production and speculation.

The evidence of the counter cyclical behaviour of commodity prices seems to prove that their long run trajectory is determined by the speculative component of their demand, which more than compensated the diminished demand for production during secular crises, and annulled its increase during the secular recovery and booms of advanced economies. Speculative capital abounds during secular crisis, because in times such as these the opportunities of productive investment are certainly diminished in advanced economies.

“Hic Rhodus, hic salta!” The myth is revealed, but this is bad news for the Chilean and many other emerging economies that have become hooked to commodity rents. The last “lost decade” of Latin America” as ECLAC calls it, for example, was not during the turbulent 1970s of the advanced economies, but during the 1980s when the latter initiated their secular recovery and commodity prices plunged. Perhaps a new lost decade will remind their leaders that the nature and cause of the wealth of nations is not oil or rocks, but human work applied to the production of goods and services that are sold in the marketplace. To achieve this, the hegemony in their elites of “treasure hunters” —as the Financial Times calls miners and other commodity based, rentier, companies— must be replaced by authentic capitalist entrepreneurs.

(The author is the Vice president CENDA (www.cendachile.cl), professor of political economy in University of Chile, Santiago, Chile. Former external research coordinator at UNRISD, Geneva, and editor of “Latin America, a New Developmental Welfare State model in the Making?” 2007 Palgrave-Macmillan, London.)