Consumers benefit from welcome fall in commodity prices

The go-go years of the commodity super-cycles now feel like a distant memory. Across a whole range of industrial commodities, prices have been falling, and in some cases drastically, since the start of this year. Meanwhile, the price of gold, the world's favourite precious metal, has stayed flat after a brief spike early in the summer.

Coal, cotton, corn, iron ore and copper are all at multi-year lows. Oil has dropped to US$80 a barrel after averaging well above US$100 since 2011. The benchmark Bloomberg commodity index has fallen more than 8 per cent this year and is at a five-year low.

Many factors contribute to the fall in prices. A significant slowdown in China's economy, long the world's largest commodity buyer, is a key cause. A glut in supply is also to blame. As a sign of a sluggish world economy, falling prices are a symptom.

But as a recent study by the International Monetary Fund has suggested, the downward trend, especially in oil, is net positive for the world economy because consumer economies such as the United States, Japan and most countries within the European Union, would benefit.

It points out that the US$20 a barrel decline in oil prices has boosted domestic demand and increased the real disposable income of consumers. Of course, as in all things economic, there are winners and losers. Commodity producers like Russia and Brazil benefited mightily from high prices in the last decade. Now the tide has turned against them.

But falling crude prices have been enormously positive for Asian economies, including China. The mainland has benefited in other ways, despite helping to precipitate the downward price spiral with a slowing economy. Falling iron ore prices, the key ingredient in steel, has helped Chinese steel producers who have long suffered from a glut in steel supply.