Wednesday, July 30, 2008

Growth and commodity prices

What has helped US avoid a recession so far? Exports - to the fast growing emerging markets, read China, India etc.

What has caused commodity prices to go up? a) Loose monetary policy, b) China's growth - it is still growing at 10%+. I was looking at the presentations of various commodity companies - Mittal, Rio, BHP etc - and they all start with China and end with China.

In the previous commodity cycles, did prices fall because excess supply came up, or did they fall because demand didn't materialize? I dont know - my guess is demand growth was much lower than expected, so excess supply got created because suppliers were betting on a higher growth rate in demand.

Is it possible that China slows down just enough for commodity prices to fall, but still grows at a good enough rate to keep US out of recession? For this, Chinese growth will need to shift from investment led growth to consumption led growth. Whether it can happen at all, or if the pass can happen smoothly is a million dollar question.

Have Olympics distorted investment demand patterns in China in a big way this year? We will soon find out.

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