Are Commodity Prices in a New Normal or will Historic Price Levels Prevail?

Over on our sister site MetalMiner, Stuart Burns recently captured the essence of a critical debate surrounding the currently inflated -- by historic standards -- prices of base metals and other commodities. In the post, Stuart questions whether or not we've currently entered a new environment where commodity price support levels have moved fundamentally higher on a permanent basis. He debates that while we hear a lot about emerging market (China) demand, is this just hype? Or are we seeing something different entirely? Certainly "the biggest change from the (relatively) steady days of the 70s to 90s is the rise in emerging market demand."

Yet things are different this time around because "during much of this time, demand followed economic cycles in developed countries and while growth occurred, it was single-digit, not the double-digit we have seen these last few years." Moreover, today, China is "both the biggest consumer and the biggest producer, creating a huge new dynamic to the supply-demand equation." The demand side of the equation has also shifted, as new sources of material "are increasingly of lower and lower grade, viable at current high metal prices but vulnerable to significant price falls."

Given these shifts and rising costs of production (e.g., "twice as high in the case of platinum"), it's safe to assume that we won't see price retreats to historic levels. Rather, volatility will continue to rule the day and "the astute will not be waiting for a return to 2000 prices but rather making a judgment on what constitutes being close enough to the bottom of a trough to buy forward and carry them through the next upswing." In other words, if commodity management is not a core competence of your procurement organization, perhaps it should become one. And at the same time, it's worth investing both time and dollars in intelligence, systems and approaches that can provide the most accurate picture into true demand so that your supply strategies end up as hedges and educated maneuvers rather than speculation and gambling.

Jason Busch

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