- Ziemowit Bednarek
Dukascopy is carrying on the research on the commodity markets and has interviewed Ziemowit Bednarek, Assistant Professor of Finance at University of Melbourne, Australia, whose current research focuses mainly on understanding how the real side of the economy affects financial markets. Professor Bednarek has shared his view on the factors influences commodity prices and compared the current situation with the 2008 crunch.
"Commodity prices have been subjected to a lot of price swings in recent years. There are two main forces in place which impact the commodities market. Other than geopolitical concerns and weather related factors, one is the real economy effect and the other is connected with the financial market forces.
The real economy impacts commodity prices through supply forces having to do with global production capacity.
Commodity prices fell sharply in the wake of the 2008 crisis and as the economies of both developed and emerging markets started to recover, the commodity markets reacted to the increased demand with rising prices. One important difference between the 2008 crisis and what is happening now, and by that I mean European debt crisis, uncertainty surrounding the U.S. economy and the political concerns in the Middle East, is that in 2008 the so-called output gap was positive and much higher than in 2011. What this means is that the global economy was producing over its capacity.
An example would be construction industry in China, where entire ghost towns remain as an aftermath, as well as construction business in Dubai. There were no fundamental forces for the commodity prices to stay at such an elevated level as right before the crisis. Now the output gap is close to zero which in turn means that global economy is producing as much as it needs. There is no overheating or at least it is not as pronounced.
Market is not anticipating that another potential recession in the near future will shake the demand for production factors as it is much more in the equilibrium with the supply than in 2008.
And the second factor influencing the commodity market, as I mentioned before, is related to the financial side of the economy. Here commodity prices will be affected not necessarily by fundamentals, but by investors' sentiment, future expectations, monetary policies of major suppliers and consumers of commodities, as well as exchange rates of main world currencies in which commodities are traded. Pre-crisis sell-off of 2008 was largely driven by the negative expectations and gloomy forecasts for the global economy which caused the speculative capital to be placed elsewhere.
However, what makes the 2008 crunch different form the current situation is the more accommodative monetary policy of major economies.
Back in 2008 real interest rates were generally lower and commodities became its own investment class. This in turn caused a bubble, a large deviation from the prices dictated by the fundamentals. Naturally, this also triggered a much higher sensitivity of commodity prices to market conditions.
Today the monetary policy is somewhat tighter, real interest rates are slightly higher, which was enough for the part of the capital to be allocated elsewhere as alternative investment opportunities are more abundant so there is no bubble to the extent that existed before.
Therefore, more balanced production demand and supply coupled with slightly tighter monetary policy are two major forces shaping the commodity markets today and making the situation different from 2008 crisis.
If we consider the forecast for the rest of 2011 and 2012, to large extent it depends on how the Eurozone will handle its crumbling economy and what events will follow in the Middle East. Moreover, central banks around the world are loosening their monetary policy by lowering interest rates which in turn helps counteract the effect of a declining global demand and keeps the prices of main commodities more or less stable."