Prices for food, oil and raw materials may have tanked during the past couple of months, but is the party over for commodities? Not by a long shot, said a group of executives from BlackRock Inc., in a press conference Monday at the firm's midtown Manhattan office.
The game is still about supply and demand, and despite the recent free fall in prices BlackRock foresees ravenous, long-term global demand for materials needed to fuel cars, build infrastructure in developing countries, feed cattle, and power up laptop computers.
"In the coming months, global growth is
likely to continue to slow but economic development [and] the demand
for raw materials of all kinds that feed that growth are still going to
be a very potent force," said BlackRock President Robert Kapito.
That certainly hasn't been reflected in the recent months. The Dow Jones AIG Commodity Index has plunged about 24% since early July after nearly doubling in the past five years, while the Goldman Sachs Commodities Index sank about 23%, BlackRock reported.
"Either this is one great big hairy bubble which is deflating, or there's a lot more subtle fundamentals at play here," said Ewen Cameron Watt, chairman of the company's central strategy group. Watt argues for the latter, taking into account trends that are defying past bubbles and historical cycles of feast and famine, war and peace.
Watt said the "real shock" to the global system are demographic shifts regarding urbanization and changes in diet in places such as China and India. He added that the strongest long-term story in the whole commodities complex is growing shortages of clean and available water, a situation he believes will get inexorably worse during the next 30 or 40 years.
The driving force behind the commodities boom are lifestyle changes. The U.N., for example, forecasts global demand for meat will double by 2050, boosting the need for feedstocks. Meanwhile, countries such as China and India are thirsting for oil and steel to lubricate and build their infrastructure development and their rapid urbanization.
"China is the biggest consumer today of all raw materials except for oil," says Richard Davis, a managing director from BlackRock's U.K. resources team. He said 400 million Chinese will move from the countryside into cities between now and 2030, a dramatic shift that will consume a lot of raw materials.
Watt believes that in lieu of a depression, oil prices are unlikely to drop beneath the marginal cost of production at $70 to $80 a barrel, and it could be higher given short supply.
Dan Rice of BlackRock's U.S. global resources team said various factors are going to keep oil supply tight, including its growing use in creating electricity as coal supply is restricted.
BlackRock currently oversees about $56 billion in active and passive commodity strategies in agriculture, energy (oil, gas and coal), alternative energy, precious metals, and mining.