Commodity prices have been in a long bear market for the last two decades. Going by the rise in consumer demand and money spent on commodities, now the situation has changed. Will the tempo continue?
Growing demand for raw materials in China, and cyclical recovery in the USdemand for goods and production pick-up, and, of course, the absence of alternative investments following the preceding slump on equity markets are some of the reasons for the escalating commodity markets. China, world's sixth largest economy, accounts for one-third of the world's consumption of alumina, iron ore, zinc, copper and stainless steel. China's exports are continuously increasing due to the increasing demand in the US, Japan and Germany. As reflected in the Reuters/Commodity Research Bureau Index (CRB Indexthe most widely followed basket of commodities in the world), commodity prices witnessed an impressive 20% growth in 2002 followed by 6% in 2003.
After World War II, economic expansion led to a rapid demand for petroleum, metal, other mineral resources and agricultural commodities. Rising population increased the demand for commodities. Due to improved technology, more knowledge, and extensive and intensive agricultural production, rise in production of commodities was more than the rise in population. New countries emerged as producers. The production reserves started piling up and commodity prices started falling relative to the prices of other goods. Buffer stocks were used by organizations to stabilize the prices, but most of the commodity agreements failed and prices were destabilized.
In the current scenario, the high-scale production going on in China due to cheap manufacturing set-up and labor demand for commodities has re-entered the market. The word `commodity' is the new buzzword in the market.
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