The commodity bulls are now roaring after Monday's near 20-per-cent jump in the price of iron ore, which sent shares in miners such as BHP Billiton, Rio Tinto and Fortescue Metals sharply higher.
The euphoric mood continued in trading overnight, helping to push oil prices higher. Brent crude, the global benchmark, climbed 5.5 per cent to a 2016 peak above $US40 a barrel. It is now 50 per cent above the 12-year low it hit in intraday trading in January. US West Texas Intermediate joined in the recovery, surging 5.5 per cent to $US37.90.
Oil prices have climbed on hopes the major oil producers will strike a deal to limit supply after Russia, Saudi Arabia, Venezuela and Qatar agreed last month to freeze output at January levels. These hopes were bolstered overnight, after the United Arab Emirate's energy minister said that current prices meant it made no sense for any country to increase production.
"This is all good news for balancing the market", Suhail bin Mohammed al-Mazrouei told reporters. "We just need to be patient."
But not everyone is convinced that commodity prices will continue their upward surge. Some analysts argue that price gains in industrial metals, such as iron ore, are largely dependent on hopes that China will introduce more aggressive policies to stimulate growth.
The bulls are hoping that, faced with slowing economic activity, Beijing will abandon its efforts to steer its economy away from heavy industry, and towards services. They're betting that China will boost spending on major infrastructure projects, which will boost demand for steel (China accounted for about half of the world's steel output last year).
But more bearish analysts point out that iron ore prices will quickly drop if Beijing's efforts to boost growth fall short of expectations.
In grappling with this question we will continue to hear a great deal about China, which is the world’s largest consumer of many commodities. Sure, China is obviously important but with commodities supply is always the most significant variable.
Will commodity exporters increase production rapidly now that industrial resources are off their lows? Well, some may but that is the equivalent of sitting on the wrong end of the branch which you are sawing off the tree.
Meanwhile, the cure for low commodity prices is low prices, which encourage increased consumption at a time when all-important supply is also decreasing.Back to top