Economic Markets

Commodity Markets

Commodity markets So far you have learned a lot of economic theory, but the real goal of all of this to see how it applies to particular markets. Over the next few pages we will take a very general look at some markets that operate in Australia. It is very likely that you will explore one (or more) of these markets in much more detail in your class.

You may have heard the word “commodities” in the news; in this country it is a word that is mentioned frequently. A commodity is a product that can only be distinguished by price. For example, if you are in the market for petrol, you might choose one petrol station over another based on price, but you are unlikely to make your decision based on your perception of the quality of the product from different providers; generally speaking petrol from one service station is the same as petrol from any other seller. Other products that we consider commodities include:

- Coffee

- Iron ore

- Natural gas

- Wheat

- Gold

In other words, almost anything that we grow or dig up can be considered a commodity.

This is a significant fact for the Australian economy. As we have a very large land mass, we tend to be relatively efficient at producing some commodities. Of the products listed above, Australia is a major exporter of all except coffee. We also sell barley, bauxite, many types of meat and fish. In other words, changes in the global market for commodities can have an enormous impact on our economy, and therefore on our standard of living.

During the first decade of the twenty-first century, China and India both began to grow significantly faster than they had in the past. Each of these countries has over one billion people, and as their economies grew these people were able to enter the workforce. This helped to increase their wealth, and therefore they became more significant players in the global market for commodities.

For example, as the Chinese economy expanded businesses in that country began to purchase a lot more iron ore from Australia. Iron ore is used in the production of steel, and this was needed so that they were able to build frames for their new factories, and also so that they could produce and sell items that are made of steel, such as cars.

These facts combined to change all of our lives. The demand for iron ore increased, and this pushed the price for this commodity much higher. When this happened, people who owned shares in companies that sell iron ore (like BHP Billiton and Rio Tinto) experienced a significant increase in their wealth. It also meant that these companies were able to employ a lot more people, as they worked to meet the demand for iron ore from the emerging Asian market. Both the shareholders and the new employees began spending their money, which created even more jobs and wealth. If you have learned the circular flow diagram of economics, you will quickly see how this one simple fact helped to benefit everyone in Australia. Once again we are able to see how various markets are interconnected, and therefore interdependent.

Some people began to refer to the beginning of this period (2005/06) as a “commodities boom”. By 2008, the governor of the Reserve Bank of Australia (Glenn Stevens) was referring to this situation as a “paradigm shift” in the structure of the Australian economy. As the Chinese economy emerged relatively unaffected by the global economic downturn of 2008/09, demand for Australian commodities increased once again. Based on this evidence, many people have concluded that Mr Stevens was correct, and that based on our proximity to China and likely future rates of growth in that country, we can expect to see a very long period of economic growth in Australia.

However, we should keep in mind that it is also possible for falling commodity prices to have a severe negative impact on the prosperity of a country. When the production of an item like iron ore attracts an economic profit, others are encouraged to enter the market, which can result in an increase in supply and therefore lower prices. Australia grew wealthy by exporting wool after World War II, but prices fell when South American producers entered the market. Many coffee producing nations are struggling to cope with depressed prices; this has come about because there is a glut of coffee on the international market.

Current Page: Commodities