Email of the day
“Very much enjoyed your audio recording for last Friday. It was well structured and thought provoking.
“It would seem that commodity related inflationary pressures should abate over the medium term. In the US, as you say, natural gas is a game changer and the implication is that oil prices should fall significantly. Also, with the consumer eventually becoming the engine for global growth, the demand for industrial metals will have passed its peak as infrastructure spending slows down. Is it your view that we begin to see a meaningful shift in the global economy towards consumer spending by the end of this decade?"
Eoin Treacy's view Thank you for your kind words and this email which may be of interest to other subscribers. Energy costs should become less of an inflationary concern as the decade progresses not least because of the development of significant new sources of oil and gas in North America. However, the supply situation for most industrial resources is more nuanced.
On the demand side of the equation, in an environment where the global consumer class becomes an increasingly more potent economic force, per capita consumption of industrial commodities remains on a secular uptrend. While an oft quoted adage from the commodity markets is "the cure for high prices is high prices" commodity super cycles seldom end because the demand component disappears. As large new sources of supply are identified and developed they usually overwhelm even the increased demand that is associated with bull markets once they hit the market.
The present situation in industrial commodity markets appears to reflect perceptions of a slowing economic growth and a moderation of China's commodity demand growth forecasts. The economic evolution of other high population countries is likely to create new demand drivers over the medium term but perhaps not in the short term. Some new supply has come to market but today's low prices and higher taxes, in a number of jurisdictions, act as a deterrent to new supply sources being developed. As industrial metals prices deteriorate, there is the real prospect of supply destruction setting in. The first clear upward dynamics are likely to signal lows of at least short-term and potentially medium-term significance.
I believe that the consumer, particularly in the world's growth centres will represent an increasingly important driver of the global economy over the next decades.