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Commodity prices ‘not exceptionally high’

Recent trading activity has raised questions amongst analysts and investors alike as to whether the mining boom is a thing of the past or whether it still has life left in it. It has also sparked uncertainty regarding which direction prices for commodities such as iron ore will go.

It has commonly been argued that the recent run up in the price of commodities will only be short-lived and that the prices will soon fall back down. Take, for example, iron ore. The steel making ingredient has rallied roughly 61% since September last year from its US$87 per tonne level to US$140 per tonne today. Analysts and experts have suggested that the price hike has simply been caused by heavy trading activity as Chinese steel mills have been restocking their inventories before a traditionally quiet third quarter.

However, stronger than expected trade data has been emerging from China, hinting that the slowdown in growth may not be quite as extreme as first thought. Platypus Asset Management resources analyst Anna Kassianos said “It is possible that if China is doing well we can bypass that seasonal (third quarter) weakness, but it’s hard to say at this point.”

Adding to the heavy speculation, HSBC chief economist for Australia and New Zealand, Paul Bloxham, stated that commodity prices in inflation-adjusted terms are not exceptionally high, but rather they were exceptionally low back in the 1980s and 1990s. In fact, he believes that commodity prices in inflation-adjusted terms were higher prior to the 1980s than they are now, which suggests that perhaps the expected plunge in commodity prices could be overhyped after all.

Although iron ore is still trading significantly lower than it was in 2011 – when it hit US$180 per tonne – companies mining the commodity are still recognising enormous profits, which is why BHP Billiton (ASX: BHP), Rio Tinto (ASX: RIO) and Fortescue Metals Group (ASX: FMG) are all ramping up their production rates.

Foolish takeaway

Mr. Bloxham’s view adds yet another perspective on the direction of commodities – as well as the companies that mine them. Although shares in most of the miners are trading significantly below their all-time highs, it may be best to avoid investing in the sector until volatility settles down, and speculation begins to look more like evidence.

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Motley Fool contributor Ryan Newman does not own shares in any of the companies mentioned in this article.

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