Fluctuating commodity prices: what are the implications for Australia?

Do recent falls in commodities suggest more severe conditions in the future? AAP/AFP

Commodity prices have see-sawed in the last few weeks amid ongoing turmoil in Europe and concerns over China.

Should we view recent falls in commodity prices with concern? Do these movements suggest more severe economic conditions for the future?

It is difficult to say, though the current highs are not unprecedented. While real commodity prices like crude oil are quite high relative to the prices reported over the last 30 years, it is important to note that periods of increasing and decreasing prices are a feature of world commodity prices and most decades prior to the 1990s have seen periods of relatively high commodity prices.

It is possible that the commodity prices movements have less impact on the Australian economy than might be expected.

The development of real crude oil prices since the late 1970s is of particular interest. The US Energy Information Administration reports that the real price of crude oil in the early 1980’s was around US$100 a barrel in today’s dollars. This is not too far from the present price of around US$85 a barrel.

Yet, by the late-1980s and through much of the 1990s the crude oil price remained around US$30 to US$40 a barrel, dropping below US$20 in 1998.

The rise in real crude oil prices from about US$20 per barrel in 2002 to around US$130 per barrel in 2008 was exceptional.

Yet, there was a large increase in crude oil prices in the late 1970s and early 1980s, with an increase from US$50 per barrel in 1978 to US$100 per barrel in 1981.

While other commodity prices have been quite volatile over the last 30 years, the more recent changes in coal and copper since 2006 provide evidence of the volatile nature of world commodity prices.

For example, Australian thermal coal prices peaked in 2008 at prices around US$190 per metric tonne. Prices then dropped fairly rapidly to around US$65 per metric tonne in early 2009.

Since then there has been a fairly steady rise in prices to around US$130 per metric tonne at the end of September.

Copper prices have also shown quite dramatic movements since 2006, with fairly stable prices around US$8000 per metric tonne until late 2008, when prices dropped to around US$3100 per metric tonne.

Prices recovered over the following months and were sitting at around US$8300 per metric tonne at the end of September 2011.

Overall, while there have been quite dramatic price falls, particularly in late 2008, there were generally steady increases in commodity prices in the years following 2008.

There is no doubt commodity prices will remain volatile for some time to come, with growing demand for commodities from China and India as well as the inevitable changes in demand that accompany the changes in the economic well-being of the developed economies like Europe, Japan and the US.

It has been argued that the Australian dollar is overvalued at present, given purchasing power parity measures and that relative consumer price index (CPI) movements suggest a long term US dollar price of at around $0.77.

While the Australian dollar stands at a price of around US$1.00, our export industries find it less profitable to sell their products overseas, This includes the commodity producers. A fall of around 25% would have a dramatically positive effect on exporters.

The Australian dollar is often argued to be essentially a commodity currency, and so if the world price of commodities fall then it is expected that the Australian dollar will depreciate as well.

If these movements are fairly closely synchronised, then falls in commodity prices – as long as Australian producers are still selling their commodities – may have little real impact on the Australian dollar profits earned by the commodity producers, while making our other exporters more competitive on the world market.

Recent economic commodity price fluctuations certainly reflect changes in supply and demand, though it is difficult to say what the long term effect will be. A 5% fall in commodity prices today could be followed by a 5% rise tomorrow. These are certainly volatile times.