A commodious collapse?

IIPM PUBLICATION
Before moving ahead, for a better comprehension of this downturn, it’s imperative to understand how this bull run took effect. First of all, China and other emerging economies have played a great role in this commodities bull run. China alone has contributed almost all of the total increase in lead and nickel consumption globally. In case of aluminium and steel as well, China has consumed as much as 50%, which is quite high as compared to China’s contribution to global GDP growth and total world output (IMF Global Financial Stability Report, September 2006). Secondly, today commodities are seen as an asset class and speculation by investors has also played its part in jacking up the commodity prices. Furthermore, the period in consideration was marked by some ultra loose monetary policies & low interest rates, making it easier to invest and speculate in commodities. Since 1995, number of contracts in NYMEX oil futures increased by almost 400%. Also, the number of non-commercial contracts in (long and short) increased to 16% from that of 9% during the same period.

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Source : IIPM Editorial, 2006

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