From Barrons:
Global demand dictates commodity prices will rise again.
THE METEORIC RISE AND FALL OF COMMODITY prices last year should end all doubt about the interconnectedness of today's global economy. Almost every economic bump is felt by everyone, everywhere, in real time. And it all happens very fast.
Starting in the 1990s, Japan endured a long and painful recession. It suffered virtually alone. Now, when there is suffering, it goes around; everyone hurts.
When the books closed on 2008, the euro zone, United Kingdom, Japan and the United States were all in recession, as were many other countries. Mexico's economy had gone flat. Even the Chinese and Indian economies had slowed dramatically, with China tumbling from 13% growth in 2007 to 6.8% in the fourth quarter of last year.
![[ovoi]](http://s.wsj.net/public/resources/images/BA-AP584_ovoi_i_NS_20090515151704.jpg) |
| Lars Leetaru |
Americans are competing against everyone from everywhere for everything, and the recession hasn't changed that.
During the boom, when everyone from everywhere was competing for everything, the prices of seed, feed, fertilizer, pesticides, oil, coal, cotton, natural gas, iron ore, copper, zinc, tin, nickel, bauxite, potash, gypsum, rubber and nearly every other commodity shot up. When the global economy took a nose-dive, commodity prices naturally fell.
The recession won't last forever. And when it ends-when consumer demand picks up- prices of raw materials will increase again.
Several factors were responsible for the pre-recession spikes in commodity prices. They still lurk behind the recessionary headlines. Among the most important: the growth of the middle class in the rapidly developing economies; large-scale infrastructure investments in many developing nations; and the emergence in these regions of a huge new consumer cohort, which has developed out of the poverty of the past.
The size of this low-income cohort dwarfs anything the global marketplace has ever seen. Approximately one billion people, one- seventh of the world's population, are moving out of poverty and entering the market as consumers. If these billion consumers were a nation, they would have the third-largest population in the world and the 10th-largest gross domestic product.
In the recent past, it was a struggle for many of these new consumers even to put food on the table. Now they are likely to be working in factories and call centers, earning money that lets them boost their protein and calorie intake. They are also spending on cellphones, consumer electronics, appliances, clothing and cosmetics. They are moving up from bicycles to motor scooters, and from scooters to small cars. They are advancing from manual farming to mechanized farming. Prior to the downturn, purchases of tractors by India's 306 million farmers was increasing at 20% per year. Such purchases push up demand for steel, rubber, fuel, seed and fertilizer.
MANY NEW CONSUMERS HAVE BEEN moving from the countryside to the cities, or from their countries of origin to lands with better job opportunities.
In China, 140 million to 150 million migrant workers (more than Japan's entire population) are constantly on the move, crowding the cities where the most work exists. Such migration has prompted increased investment in housing, roads, railways, electricity and other infrastructure projects. This also has affected commodity prices.
Merrill Lynch estimated last year that the developing economies would invest some $2.25 trillion annually over the next three years to meet their infrastructure needs. While the recession may slow investment in some countries, China has responded to the slowdown by increasing its planned infrastructure spending.
China lacks the raw materials it needs to manufacture steel. This has turned it into the world's largest importer of iron ore. It has been accounting for 40% or more of the international iron-ore trade in recent years.
China's need for steel will continue long into the future. Remember that the U.S. took 35 years to finish its Interstate highway system. It took 16 years for Japan to build its New Trunk Line railway. Even with China spending a reported 9% of its GDP on infrastructure, it will take decades to bring its roads, ports, airports, power-generation capacity and other infrastructure systems up to speed.
THE THIRD CRITICAL ELEMENT in the commodities story is the explosive growth of the global middle class. China's National Bureau of Statistics estimates that 350 million Chinese will attain middle-class status during the next 10 years.
The brokerage firm CLSA estimated in 2007 that some 70 million Indian households already had attained that status, loosely defined as including people with incomes ranging from $2,000 to $44,000 per year. Such numbers continue to rise.
All of these factors-the emergence of an unprecedented low-income consumer cohort, large increases in infrastructure expenditures and the growth of the global middle class-pushed commodity prices higher.
World leaders are struggling to get their economies growing again. Many, including the U.S., will pour hundreds of billions of dollars into infrastructure.
We can't predict what effect such projects will have on the American economy or those of other countries. We can predict that increased demand for steel, copper, cement and other construction materials will be reflected in commodity prices.
They may not rise soon to pre-recession levels. But they will increase. Even in bad times, Americans are competing with everyone from everywhere for everything. The recession hasn't changed that.
HAROLD L. SIRKIN AND JAMES W. HEMERLING are senior partners of The Boston Consulting Group and co-authors, with BCG partner Arindam K. Bhattacharya, of Globality: Competing with Everyone from Everywhere for Everything (Business Plus, June 2008).
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