Skip to main content

"One Way Ride for Commidities: Down"

Morgan Stanley's Ruchir Sharma was recently given the cover of Newsweek to explain in detail why commodity prices can only head down in the long term.

Yet the fact is that the world has faced all these issues before, and for the past 200 years, commodity prices have been trending downwards, thanks to new technologies, greater efficiency in extraction and the substitution of one commodity for another (which explains the high correlation between commodities prices). Bank Credit Analyst, a research firm based in Montreal, has data showing major industrial commodity prices are 75 percent below where they were in the year 1800, after adjusting for inflation. Despite all the worries over "peak oil," the fact is that the major bear markets in oil have been demand, rather than supply led. And when demand eventually picks up, there's usually some new alternative (nuclear energy, natural gas, green technologies) waiting to pick up some of the slack. The real price of oil today is now at the same level as in 1976 and, before that, in the 1870s, when oil was first put to mass use in the United States. This long-term price decline is due mainly to the constant discovery of new fields and greater energy efficiency, making nonsense of the idea that the world is rapidly running out of oil. The experience of the 1980s is instructive in the current context as well.

Japan and Europe continued to grow strongly in the 1980s, and yet oil consumption remained essentially flat through that decade as both the regions strived to achieve better fuel efficiency and switched to alternative sources of energy, such as nuclear power. Similarly, 90 percent of the growth in new oil capacity since 2004 has come from biofuels, synthetic oil and natural-gas liquids. As countries get richer, their per capita consumption of commodities declines. It's a myth, then, that the boom in China and India will inexorably drive up oil and other commodity prices.

...The reason oil prices did not spike higher is simple: demand for any commodity is price-elastic, which means that once the price goes too high, consumers stop buying it or make heroic efforts to find a substitute. In the 1960s and '70s, the revival of manufacturing in Japan and Europe propelled prices for industrial metals like copper and nickel higher, until the buyers couldn't take it anymore. Total spending on copper peaked at 0.45 percent of the global economy in the mid-1960s, and on nickel at 0.2 percent in the 1970s. Once copper prices got too high, aluminum was used as a substitute in many functions. As commodities are inputs in themselves, they can justify only a certain share of the total costs before it becomes prohibitive to consume the end product.

...(History) shows that only one commodity rises in an inflationary environment: gold. Other commodity prices tend to bloom only during the mature stages of a boom when the global economy overheats and demand briefly exceeds supply. At the moment, supply for nearly all commodities far outweighs demand, and likely will decline for at least the next couple of years.

Arun Natarajan is the Founder & CEO of Venture Intelligence, the leading provider of data and analysis on private equity, venture capital and M&A deals in India. View free samples of Venture Intelligence newsletters and reports. Email the author at arun@ventureintelligence.in

Popular posts from this blog

EY Tops League Table for Transaction Advisors to M&A deals in 24

Moelis & Company & PwC claim the No.2 & No.3 slots Ernst & Young  (EY) topped the Venture Intelligence League Table for Transaction Advisor to M&A Deals   during 2024, advising 34 deals worth $4.1 Billion. Moelis & Company stood second advising 2 deals worth $3.9 billion. PwC followed with 18 deals worth $3.3 billion. Citi ($2.5 billion across 1 deal) and Advay Capital ($2.3 billion across 1 deal) completed the top five. Among the largest M&A deals in 2024, Citi  advised $2.5 Billion acquisition of the Indian business of American Tower Corporation by Brookfield , Advay Capital and Moelis & Company advised the $2.3 Billion acquisition of Care Hospitals by Aster DM Healthcare . Jefferies & Co., JP Morgan and Moelis & Company advised the $1.6 Billion acquisition of Bharat Serums & Vaccines by Mankind Pharma.  Among the other notable M&A deals in Q4 2024, EY advised the $685 million acquisition of ITD Cementation ...

Morgan Stanley tops League Table for Transaction Advisors to M&A deals in 2020

Morgan Stanley , which advised the $10.1 Billion strategic investment by Facebook and Google into Reliance Industries' telecom arm Jio platforms (among other Private Equity investments in the company), topped the Venture Intelligence League Table for Transaction Advisor to M&A Deals for 2020. Ambit Corporate Finance - which advised 3 deals worth $4.0 Billion, including Brookfield's $3.7 Billion acquisition of Reliance Tower Infrastructure Trust -  took the second spot. JM Financial ($3.7 Billion across 5 deals), Metta Capital ($3.4 Billion across 3 deals) and ICICI Securities ($3.4 Billion across 2 deals) - all of whom (along with Citi) are advisors to the $3.4 Billion acquisition of Future Group's retail related ventures by Reliance Retail, announced in August - completed the top five. The  Venture Intelligence League Tables , the first such initiative exclusively tracking transactions involving India-based companies, are based on the value of PE and M&A tra...

Everything you wanted to know (and some things you didn't care to know) about ChrysCapital's Ashish Dhawan

New Delhi-based private equity fund ChrysCapital is vastly different from its former avatar, Chrysalis Capital. While Chrysalis began life (in Mumbai) as an venture capital firm focussed on start-up investments, today's ChrysCapital is best know for its late-stage investments (often in already public companies). The fascinating part of this transformation is that one of the fund's original partners - Senior Managing Director Ashish Dhawan - has been firmly in the driver's seat throughout the process. It's a story that needed to be told. As a cover story. Kudos to Business Today for telling it first. Thankfully, unlike the glowing profiles that BT is famous for - including the one featuring infamous stock brocker Harshad Mehta with his Lexus on the cover - this one has a lot of facts. Some well known. And others less so. That ChrysCapital's first fund would have been a disaster but for the pioneering investment in Raman Roy founded BPO firm Spectramind i...

Why did Sony Entertainment Television's CEO quit?

Businessworld has a cover story on the corporate battle that resulted in Kunal Dasgupta, the CEO of Multi Screen Media (formerly Sony Entertainment Television), quitting just a few months before his contract was due to end. Dasgupta’s abrupt exit was the culmination of six years of tension between majority shareholder Sony Pictures Television International (SPTI) that owns 61 per cent of MSM, on one hand, and Atlas Equifinn on the other, which is a consortium of Indian shareholders (Singapore-based Rakesh Aggarwal, World Media Group director Sudesh Iyer, Shemaroo Entertainment Managing Director Raman Maroo, MobiApps Holding’s Jayesh Parekh, B.R. Sule, Sushil Shergil and actor Jackie Shroff ) holding 32 per cent. Capital Japan and some financial institutions own the rest 7 per cent. And of course, the third protagonist is Dasgupta, who walked a tightrope and managed to keep his job for over 14 years despite the fact that neither group of shareholders was too happy with him. Very little...

APEX VC Awards: Chiratae Ventures, Blume Ventures, Elevation Capital, Stride Ventures & Alteria Capital judged best funds of 2021

Press Release Elevation Capital , Chiratae Ventures , Blume Ventures , Stride Ventures and Alteria Capital were voted the top Venture Capital investors in India during 2021. The Venture Intelligence “Awards for Private Equity Excellence” (APEX) is dedicated to celebrating the best that the Indian Private Equity & Venture Capital industry has to offer. "VCs exist because Entrepreneurs exist and disrupt the ecosystem by creating new businesses. We are very excited to be part of the secular trend of tech disruption that would power India’s journey towards $ 10 Trillion economy over the next decade," said  T C Meenakshi Sundaram, Founder & Vice Chairman, Chiratae Ventures , winner of " VC Fund raise of the Year " award.  " We wish to thank all our entrepreneurs who have chosen to take funding from Chiratae Ventures and investors who have backed us with funds over the past 15 years in this journey.  Congratulations to the entire Chiratae Ventures team and ...