Commodity story

PUBLISHED : Wednesday, 06 June, 2007, 12:00am
UPDATED : Wednesday, 06 June, 2007, 12:00am

A senior business reporter at the South China Morning Post looks at the key role played by things such as oil, metal and grain

They're not very trendy, and not many people understand them, but they're a part of everything you eat, wear and walk on. Commodities are the building blocks of our modern world, whether they are grown by farmers, mined out of mountainsides or sucked out of the ground.

You may not hear much about commodities in your daily life, at least not compared to stocks, bonds and other financial terms.

For many years the image of commodities has been one of sooty miners, country-bumpkin farmers and dirty machinery that no one wants to live near. But things, such as oil, metal and grain, are generating more and more headlines around the world because demand for them is growing but their supply is limited.

Basic needs

Most commodities are traded on futures exchanges, where investors can buy and sell contracts for supplies that will be delivered in the future. The Chicago Board of Trade and the London Metal Exchange are two important commodities markets.

Prices for wheat, rubber or fuel oil are based on supply and demand. If there's more wheat than the world needs, prices go down. But if there's not enough to go around, or people are afraid that supplies may run out, prices go up. Lately, prices for many commodities have been rising, fast.

China is a big part of the commodity story. The mainland's economy is booming, which means demand for more roads, cars, houses, clothes and food, and making all of those things requires raw commodities. Oil, for example, appears in just about everything you touch. Look around you. Water bottle? Made from petroleum. The carpet? Synthetic materials made from oil.

The same goes for metals. Look around at how many wires are snaking through the walls of your house. Many of them are made from copper, which is mined from the ground. Commodities are the basic material that is refined, cleaned, smelted, moulded and built into items we use in everyday life.

What makes commodities interesting is that everyone must have them. They also tend to be natural resources, or part of the natural composition of the world around us. That makes finding them and moving them to where they are needed a very costly, exciting and international business.

Oil is a great example. It is created by living things that died and have been rotting under the ground or sea for thousands of years. Countries have gone to war over the right to oil supplies that are still buried under the sand.

Some experts say that because pollution is ruining rivers and lakes, countries will eventually fight over clean water supplies. And who has the commodities that everyone else wants? Some countries are rich in natural resources, such as Canada, Russia, Brazil, Saudi Arabia, South Africa, Malaysia and Australia. Hong Kong has almost no natural resources, and has to import everything it needs.

Rising demand

Increasing demand from China, along with strong economic growth in other places, has pushed demand for many commodities higher than current supply. Building new mines or oil fields takes a long time and a lot of money, so sometimes supplies are tight because the industry isn't ready for higher demand. Supplying commodities tends to be done by big businesses. A small company cannot afford to dig a mine or an oil well. Even farming has changed from a small family business to one done by big corporations.

Commodity prices have been rising steadily, and are predicted to remain strong, even if the stock market crashes. Banks have also made it easier for people to invest in commodities. You can buy funds that invest in commodity futures, or in the companies that drill, mine, ship and refine commodities.