Commodity Price Cycle

“We will not bet this company,” said BHP Billiton CEO Chip Goodyear this week, while presenting record group results for the year to June 30, 2005. The world’s biggest diversified resources company posted a bottom line profit of $6.5-bn for the year, a growth of nearly 90% on the previous year’s figure.

On the question of betting, Goodyear was referring to a graph which shows that despite the monster profits delivered by BHP Billiton, commodity prices are barely out of the starting blocks from 200-year lows.

Goodyear’s amazing graph was compiled from a variety of sources, including the US All Commodities Producer Price Index, US Consumer Price Inflation, US Bureau of the Census, Historical Statistics of the United States, and the Colonial Times, to 1970.

Goodyear stressed that the graph needed to be looked at “quite carefully.” A small move on the graph, Goodyear explained, “is actually several decades.” According to the graph, “today we find ourselves at a period of time which is, or rather close to it anyway, 2001/2002 when real commodity prices were the lowest they’ve been in the last 200 years which essentially puts them at the lowest price they’ve been in known history.”

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History has shown that all major bull-markets in commodities have coincided with rising political tensions and war. In other words, whenever shortages in natural resources caused prices to rise, nations did everything in their power to secure their share.