• Mainland China has been regarded as among the most significant factors behind the phenomenal surge of global commodity prices in the period 2003 to mid 2008.  A major reason was that the country accounted for a majority of the increase in the global consumption of oil and metals during the period.  More significantly, a substantial share of its oil and metal needs had to be bought overseas.

• On a per capita basis, mainland China's consumption of oil and metals was still only a fraction of those of the more developed countries like the US, Japan and South Korea, suggesting that the potential growth of the country's commodity demand would be enormous in the years ahead.  The impact on the global commodity market would be especially significant as many of the Mainland's key commodity reserves are insufficient to meet future demand, according to the country's own projection. 

• Mainland China began to speed up its global search for oil and metals at the turn of the century.  Close to 40% of its US$56 billion outward investment (excluding those in Hong Kong SAR) in the period 2004-2008 was related to mining ventures.

• Looking ahead, mainland China will continue to be a major force shaping global commodity prices for years to come, but slack demand from other countries as a result of the present economic slump and new production capacity built prior to the financial crisis may help offset price pressure originated from China's demand.  Accordingly, while global oil and metal prices are likely to rise further in the medium term, the pace of growth may not match that of the past several years.

The world commodity market has over the last few years experienced one of the most spectacular boom-bust cycle since the 1970s.  While prices have come down in the past year, the shear magnitude and duration of the recent boom have called into question whether there has been a fundamental shift in the global supply and demand for commodities, and whether commodity prices have jumped to a higher, long-term growth path.

The 2003 to mid 2008 commodity market boom

After surging 230% between January 2003 and July 2008, global commodity prices as measured by the IMF fuel and non-fuel commodity price index plummeted 56% by February 2009 as the global economy dipped into the worst slump since the Great Depression.

Global commodity prices have since rebounded by about 30% under the concerted effort of the major countries to revive economic growth.  The boom-bust cycle would have been even more dramatic had there not been a milder increase in food prices in the period.

Many suggestions were put forward to explain why commodity prices could have risen so vigorously and persistently in the first place.  One was inadequate capacity to meet rising demand, especially in the initial stage of the boom, as a result of a lack of capacity investment after years of falling commodity prices in the 1980s and 1990s.  

Another was intermittent supply disruptions due to power shortage in South Africa that helped push precious metal prices up, or problems in Nigeria, North Sea and, especially Venezuela, that lifted crude oil prices to above USD100 a barrel.  

Yet another was policy measures such as the loose monetary environment in the US that might have contributed to at least some of the price increase.  But a stronger and persistent global economic growth between 2003 and 2007 was probably the most convincing reason.  After all, a sustained increase in commodity prices needs the support of economic fundamentals.  In the five years ended 2007, the global economy grew at a faster pace of 4.7% per year than the 3.2% per year of the preceding five years.

Economic growth in developing Asia was especially impressive, averaging 9.3% per year for the period 2003-07 compared with only 5.9% for the preceding five years.  Not surprisingly, mainland China with the strongest economic growth in the region was singled out as among the most important factors for the commodity boom.  In the period 2003-07, mainland China's economic growth averaged 11.0% per year, up from an annual growth of 8.2% in the preceding five years.

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