Commodity prices likely suppressed for 15 more yrs - economist

Jan 13 2016 20:30
Carin Smith

Cape Town - Commodity prices are very likely to remain suppressed for another 15 years or so if one follows the repeating history theory over the last four cycles since 1887, economist Mike Schussler of economists.co.za said on Wednesday.

These cycles are about three decades long each. Each cycle has an upward decade and a massive declining five year period followed by a slower downward decline of 15 years or so.

The last part of the cycle is perhaps more flat in nature before the last fall in prices results in the cycle starting all over again.

Each peak had a decade or so of rising commodity prices before it. That is followed by a decline of about five years or so and then a slower declining or flat period of 15 or so years.

The peak years were 1917; 1951; 1980 and 2011. The troughs were 1931; 1971 and 2002.

The next trough should, therefore, be around 2030, according to Schussler.

"The cycle currently shows that the world has entered the fastest slowdown in commodity prices since 1931 over any four year period. Currently we are on track for the fastest five year decline since then too," said Schussler.

In his view the result will be a massive realignment of the world economy.

"The power now goes back to the consumption-based economies. Advanced economies will be big beneficiaries, while commodity and oil producers in Latin America, Africa and the Middle East - including Russia - will find economic growth slow," he explained.

"The bad news from history here is that the price of commodities declined and dropped and stayed low for about 20 years in every case as the high growth faltered somewhat just as a major new supply of commodities came to the market," said Schussler.

The average real price total decline from peak to trough was 56% in real terms. So far the index has declined only 38% in real terms in the last four years.

The real problematic part for Schussler, however, is that the nominal fall in prices is the fastest over any four year period since 1931.

"So it looks like there will probably be further actual declines in the next decades, although at a slower pace - hopefully," he said.

mike schussler  |  sa economy  |  commodities



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