Commodities boom or bust?
Andy Sandford, editor of Engineering Capacity
If you read the newspaper headlines you will know that Goldman Sachs has declared that the commodities bubble has burst. They have done no such thing, of course – writes Andy Sandford.
If you look just a little bit closer it is clear that what they have actually done is advise their clients that now would be a good time to take their winnings on a very lucrative bet that a group of key commodities would go up in price. The so-called CCCP basket of commodities – crude oil, copper, cotton/soybeans and platinum – has proved very profitable for investors, showing a 25% increase in just four and a half months.
What Goldman Sachs predicted was that it wouldn’t go up much more in the short term due to added risks – such as the unrest in the Middle East and reduced demand as a result of the disruption to the Japanese economy after the earthquake/tsunami/nuclear crisis. And indeed the influence of Goldman Sachs is such that some markets even went down temporarily, simply on the basis of their announcement.
But let’s not get confused about long-term trends by what an investment bank does to make its clients money (even if it is very good at it). Goldman Sachs itself said that it saw some upside in the next twelve months. In other words, commodities are going to keep on going up. And they will have to as the market responds to the ever increasing demands of the developing nations.
Is this a bad thing for us? Well, it might not make us particularly happy when we fill the car up with petrol or get to the end of the supermarket checkout queue, but in the long run this is the market’s way of evening out the playing field for UK manufacturers in a global market.
As raw material and transport costs increase, the arguments against importing from distant low-cost suppliers increase. Wage costs too will become more equal. As the cost of basic foodstuffs rises wages for ‘low-cost’ workers will have to rise to prevent social unrest. And as the developing nations continue to develop – becoming increasingly urbanised and creating ever bigger professional middle classes with strong lifestyle aspirations, not only will their costs increase, but they will also provide an eager market for our (increasingly cost-effective) imports.
It’s easy to get side-tracked by short-term events, but the long-term trends clearly underline the fact that this country’s manufacturers should have plenty of success to look forward to if they stay in the game.
