New Commodity Price Regime

New commodity pricing paper that’s worth a read. It predicts a new pricing regime ahead.

We believe that a crucial and under-explained shift is taking place in commodities markets that will have profound effects on corporate competitiveness. In particular, we believe that the next five years will see a significant, secular increase in prices across a range of commodities, including hydrocarbons, minerals, and food, and that this increase will have a meaningful impact on corporate strategy and operations, beyond simply adjusting to a higher cost environment.

In the last five years, the surge in commodity prices reversed more than a century of steady but almost continuous price decline. For example, 2011 prices averaged nearly 70 percent more than 2001 base prices across nearly every key commodity, bar oil (see Figure 1). For most commodities, this increase was the result of fundamental economic forces, not just secondary speculation or short-term supply/demand mismatch. This suggests that the kinds of “corrections” seen in mid-2011 are transitory and should not obscure the overall upward trend. Furthermore, we expect to see additional volatility in the next 18 months that will tempt planners to ignore or rationalize away this secular trend. Companies that accurately perceive and get ahead of this underlying trend will prosper, while those that fail to acknowledge or plan for its impact are likely to suffer.

The right perspective and time scale are essential to making sense of these changes. Most discussions of fluctuating commodity prices tend to focus on either short-term predictions of volatility or long-term conjecture about highly uncertain trends. These discussions are usually too tactical to guide strategic choice or too speculative to drive concrete action, making their conclusions not very helpful to CEOs wrestling with how to interpret these trends. As a result, we see an emerging blind spot in corporate planning for the time frame that matters most: the medium term of the next five years. This paper is for CEOs and decision-makers seeking to eliminate this blind spot and be better
prepared for the impact of this transition.