The anatomy of three commodity booms

doi:10.1016/j.resourpol.2006.06.003

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Volume 31, Issue 1, March 2006, Pages 56-64

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Abstract

Three major commodity booms since the second world war are identified and analyzed. In all three, demand shocks predominated as triggers to the commodity price rises. The first boom, in 1950–51, was caused by the massive inventory buildup in response to the Korean war. The second, in 1973–74, was accentuated by widespread harvest failures and by OPEC's market management, which tripled the price of oil. The third boom started in 2004 and has not yet run its course. This time, the explosive growth of China's and India's raw materials demand has played a key role. The first two booms collapsed as the world economy went into recession and excessive inventories were sold out. The third boom may prove more durable since the world economy continues to expand briskly and commodity inventories have remained small.

Section snippets

Overview and method

The purpose of the present paper is to study and compare the nature of the three most dramatic price booms in international commodity markets since the second world war. The first of the three events to be explored began in 1950, when price quotations exploded and remained at high levels during the two following years. The second one occurred in 1973, but prices fell back sharply already in 1975. The third boom event is still going on as this is being written (June, 2006), after the forceful

The macroeconomic contexts of the booms

Table 1 details some macroeconomic data over the 4-year periods during which the commodity booms occurred. As noted, the inflation numbers reflect the changes in the US dollar prices for manufactured exports from the rich world. Because of lack of reliable and coherent statistics, my measures of the growth of GDP and of industrial production during the first and second booms relate to the OECD region (or to its predecessor OEEC) whose economy at those times accounted for no less that two-thirds

The first commodity boom

This boom was clearly and strongly related to the Korea war, which broke out in June 1950, with an armistice reached in July 1953. The impact of the war on commodity markets was both direct and indirect. The direct impact arose from the insecurity felt about industrial materials supply, amplified by the painful experiences of the second world war that had ended only 5 years prior to the new conflict, and by the importance of South and East Asia in the proximity of the war theater, as supplier

The second commodity boom

The second boom was much stronger than the first. It was also much more pervasive in that the prices of all commodity groups rose sharply. Similar to what happened in the first boom, a very strong macroeconomic performance during 1972 and 1973 (see Table 1) constituted an important trigger to the rising commodity prices. But there were two additional triggers. One was that the boom had been preceded by two consecutive years of widespread crop failures, on which a dramatic cut in Peruvian

The third commodity boom

The third commodity boom started in 2003 and, as is apparent from Fig. 5, it has not yet run its course. Like the preceding booms, it was importantly triggered by a demand shock. The examples of oil and copper can be used as supplementary evidence to the numbers in Table 1: the 2004 global demand increase for both commodities was the highest on record over the preceding 30 years. Producers were caught unaware, and with the contemporary habit of just-in-time inventories in many production

A summary and reflections

Table 2 provides one type of overview of the three commodity booms. It shows the peak level for each of the commodity indices in constant dollars, along with the quarter when the peak occurred. The numbers reveal the second boom to be by far the most powerful in aggregate terms. But this is importantly because the energy prices went up so strongly in 1973 and 1974. The rise of the agricultural raw materials prices during the first boom overwhelms what happened during the second, while metals

Acknowledgment

Valuable comments on an earlier version of this manuscript from Chris Gilbert, Gustavo Lagos, John Tilton, participants at a seminar in the Mining Center of the Catholic University of Chile, and two anonymous referees, are gratefully acknowledged.

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