Energy, metal and agricultural prices that more than doubled since 2000 are still close to highs reached before the financial crisis, even after commodities from gold to wheat dropped into bear markets, McKinsey said in a report today. “Commodities have risen more sharply than global economic output since 2009.”
A surge in raw-material output in the past two years and signs of cooling economic growth in China, the world’s biggest consumer of everything from cotton to zinc, prompted banks including to Goldman Sachs and Citigroup to say the super cycle ended, halting the longer-than-average period of rising prices. Producers need to go further afield and use more complex methods to get access to new supplies for expanding consumption, McKinsey said.
Production expenses in the long term continue to escalate for many commodities, according to the report. While there are no imminent shortages, higher marginal costs “appear to be pervasive and put a floor under the prices,” McKinsey said. Volatility is increasing amid evidence of a “structural supply issue,” according to the report. Arable land in China is being built over as the nation urbanizes while in Brazil prices for farmland have jumped as much as seven-fold in some regions over the past decade because of rising global food demand, stricter environmental laws and expansion of protected areas.
Still, Pimco portfolio managers Nicholas Johnson and Greg Sharenow warned last week that the commodities market isn’t likely to see the spectacular annual gains it’s experienced in the past. They said they believe future price appreciation for commodities won’t mirror the super cycle of double-digit annual growth from the late 1990s until the 2008 financial crisis, but that doesn’t imply a negative view on commodity returns.
The report does not make any forecasts, but warns about various trends.