This is a summary of part of Goldman Sachs’ 2010 Commodity Outlook
The commodities investor has typically seen commodities as substitutes: for the past five years, price convergence has been a feature of commodity markets.
Supply shortages are changing that. A lack of investment coupled with protectionism has led to shortages of most commodities, natural gas and nickel being notable exceptions. Supply shortages will lead to greater price divergence between commodities. Three factors will determine the price: supply constraints, investment constraints, and emerging market demand.
On the whole, emerging markets are willing to pay more than developed economies for commodities, which is leading to a realignment of resources from developed to emerging markets.
The realignment is also accelerating, as falling demand in developed countries has increased the supply available to emerging markets, whose demand, in some cases, has increased during the crisis. When developed economies do begin to recover, they will face reduced production capacity.
Resource realignment will likely increase the relevance of commodity prices to the broader macroeconomic environment. Exchange rates, real and nominal interest rates and stock exchanges will become increasingly correlated to commodity prices until supply constraints are resolved and commodities’ impact on growth is reduced.
Supply constraints persist in spite of a decade of sharply increased commodity prices. In a notable shift, “the inability to grow supply based after a decade of sharply higher prices turns the question of the sustainability of higher long-term commodity prices to one of the sustainability of higher long-term growth.”