The West struck a Faustian bargain with China in the 1990s and early 2000s. Manufacturing jobs would be outsourced to east Asia in exchange for cheap goods coming in the other direction. That was bad for Western production workers, good for consumers.
Now it transpires China's growth miracle is not especially good for Western consumers either. The rise in global commodity prices stimulated by China's overheating economy is making fuel, food and industrial goods dearer, thus squeezing living standards.
The picture is complicated by the fact that the boom in commodities creates winners and losers. Countries pumping oil or mining metals are enjoying booms on the back of strong growth in China and India.
China's imports from Australia, Latin America and Africa were almost 50 per cent higher in the first quarter this year than a year earlier. The flipside is that China is running stonking trade surpluses with the US, Britain and the eurozone, worth $US361 billion
($338 billion) in the year to April.
Beijing argues that China's trade surplus is well down on the peak in the year to March 2009, but that is only because its refusal to allow its currency to appreciate more rapidly has led to global commodity prices rising fast.
That has added to China's import bill and stoked inflationary pressures in emerging and developed nations.
But it would be wrong to pin all the blame on China for volatility in commodity prices. Part of the recent oil price rise has been caused by the unrest in North Africa and the Middle East, which has added a risk premium of perhaps $US20 a barrel to crude prices.
Western policymakers did not have to base their economic strategies on unsustainable consumer booms they did not have to deregulate markets so that the upward trend in commodity prices justified by economic fundamentals (the growth in the emerging world) has been accentuated by the use of derivatives to speculate in futures markets.
They could have been careful with quantitative easing to ensure the newly created money was used as seed capital for productive enterprise rather than as casino chips. They could have come to an agreement to use buffer stocks to limit price movements or been more creative with the use of strategic reserves of oil a public announcement that stocks were being run down would have burned the fingers of the speculators given the highly leveraged nature of trading.
Clearly lessons have not been learned from the mistakes of the recent past. Commodities are the new asset-backed securities. The imbalances in the global economy are as glaring as they were in 2006 and early 2007. Financial markets have not been reformed and there is once again the assumption that things will all work out well in the end.
Perhaps they will. Looked at in one way, the recent performance of the global economy has been impressive. The hope is that central banks and finance ministries will continue to muddle through. China has been using a mixture of price controls and modest rises
in interest rates as it seeks to bring down
inflation without causing a hard landing.
The US has been pumped up with cheap money and large budget deficits the trick for the Federal Reserve is to remove the stimulus without triggering a double-dip recession.
This all sounds uncomfortably reminiscent of the Goldilocks scenario - not too hot and not too cold but just right. For it to transpire, commodity prices have to ease gently, reducing inflationary pressure and thus making life less complicated for policymakers.
If they come down rapidly, the Chinese trade surplus will rise as the cost of imports goes down. Unless the authorities in Beijing are prepared to allow the renminbi to float, which they are not, they will have to intervene in the currency markets, but this will make it harder to slow credit growth at home and makes a boom and bust more likely.
If, on the other hand, commodity prices continue to rise, central banks everywhere will come under pressure to raise rates.
A sharp correction in commodity prices looks the likelier option in the short term. Every bubble in recent years has had its signature deal that marks the point when the frenzy peaks. This month the Swiss commodity trader Glencore will float, and it would come as no surprise to see the event overshadowed by a crash in commodity markets. This, lest we forget, is a global economy still in rehab.
There are good reasons to believe the trend in commodities is up. But upward trends always have dislocations and this looks one of those moments. Rarely has the old adage "sell in May and go away" seemed more apposite.
Frequently Asked Questions about this Article…
Why are global commodity prices rising and what does that mean for everyday investors?
The article says much of the commodity-price surge is driven by strong demand from China (and India) plus supply shocks such as unrest in North Africa and the Middle East. Higher commodity prices push up fuel, food and industrial costs, squeeze household living standards and raise inflation risks — all of which can affect consumer-facing stocks, bond yields and central-bank policy that everyday investors should watch.
How does China's growth and trade surplus affect global markets and investor portfolios?
China’s rapid growth has boosted imports of commodities (imports from Australia, Latin America and Africa were nearly 50% higher in the first quarter year‑on‑year) while running big trade surpluses with the US, Britain and the eurozone (about US$361 billion in the year to April). That combination can lift commodity prices and inflation globally, create winners among resource exporters and put pressure on exporters and consumers in deficit countries — factors investors need to factor into asset allocation and sector exposure.
Who wins and who loses from higher commodity prices?
According to the article, commodity exporters (countries and companies pumping oil or mining metals) tend to benefit from higher prices, while consumers and import-dependent economies face higher living costs and squeezed margins. For investors, that means resource-sector stocks may outperform during booms, while consumer discretionary and low‑margin businesses can struggle.
Could commodity markets crash and what would a crash mean for investors?
The article warns a sharp correction in commodity prices looks plausible in the short term. A rapid fall would reduce inflationary pressure but could boost China’s trade surplus (as import costs fall), risk destabilising commodity producers and resource-heavy markets, and potentially trigger wider market volatility — so investors should consider diversification and risk-management strategies.
How do central bank policies and quantitative easing influence commodity inflation and markets?
The piece argues that cheap money and large budget deficits (notably in the US) and loose monetary policy can amplify asset-price moves, including commodities. The article suggests policymakers could have channeled QE into productive investment rather than letting it flow into speculative markets; for investors, that means central‑bank moves to remove stimulus or raise rates can materially affect inflation expectations, bond yields and equity valuations.
Why does the renminbi (Chinese currency) matter to global investors and trade balances?
The article notes Beijing’s reluctance to allow the renminbi to appreciate rapidly has contributed to China’s trade surplus and to rising global commodity prices. If China doesn’t float the renminbi, it may intervene in currency markets — a move that can complicate China’s efforts to slow credit growth and raise the risk of boom‑and‑bust cycles, all of which are relevant for investors watching currency, export and commodity exposures.
What role does speculation and derivatives trading play in commodity price volatility?
The article compares commodities to the new ‘asset‑backed securities,’ arguing that speculative use of derivatives has accentuated the upward trend in commodity prices beyond fundamentals. For everyday investors, this means commodity price moves can be amplified by leveraged speculative positions, increasing short‑term volatility and the need for careful position sizing and risk controls.
Should investors be concerned about Glencore’s upcoming float and possible market fallout?
The article highlights that the Swiss commodity trader Glencore is scheduled to float and says such a high‑profile listing could be overshadowed by, or even coincide with, a crash in commodity markets. While the IPO itself isn’t the cause, big listings in frothy markets can mark the peak of a bubble, so investors should be cautious, assess valuation and consider how a commodity downturn would affect companies like Glencore and broader portfolios.
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