The long-running commodity boom came to an abrupt end in the summer. Previously, prices had been vaulting from record to record in ever shorter intervals, in the end seeming to defy fundamental factors. Now our expectations have been confirmed and disillusionment has set in. Within the twinkle of an eye commodity prices slid on a broad front. Has speculation had the wind taken out of its sails? What were the triggers, how far can the correction go?

At the beginning of the seventies, Brazil was heavily dependent on energy imports. The oil crisis of 1973 therefore dealt a massive blow to the country. Within the shortest space of time, the trade deficit had ballooned tenfold and currency reserves had halved by the middle of the seventies. In the course of the industrialization policy, the goal of which was to substitute imported goods for domestic products and which culminated finally in the debt crisis of the eighties, Brazil endeavored to lower its dependence on oilimports. On the one hand, the country greatly expanded its own oil production and on the other it invested in developing alternative fuels such as ethanol.

Last year’s escapades on the oil market, with prices peaking at USD 80 a barrel, appear to be past history. Since their August 2006 high, oil quotations have at times been as much as 35 % lower. At present, benchmark-grade Brent crude is back above the USD 60 mark. What are the factors nourishing such volatility and what is the outlook?

The development in crude oil prices (almost) always plays an important part in economic debate. As a rule the focus is on the immediate economic impact. Rising crude oil and energy prices, so the argument runs, directly curtail household purchasing power, which in turn hits private consumer spending. In the corporate sector mounting cost burdens and falling sales expectations cause companies to hold back on investment. Both put the brakes on economic growth. This is why strong surges in crude oil prices often lead to downward revisions in economic forecasts for the current and/or following year, depending on when they occur. Longer-term economic effects, however, pass almost without comment - particularly if oil price rises are not perceived as lasting - and are virtually disregarded in economic forecasting.

After spending two decades in a deep slumber, the commodities sector surprised the majority of market players by staging a dramatic upturn at the start of the new millennium. After a boom that had lasted more than three years, there was a quite marked consolidation phase in commodity prices in 2005. However, that phase effectively spanned only the second and third quarters of the year, before ushering in – much earlier than expected – a continuation of the upward trend, with individual commodity prices taking it in turns (as usual) to assume the role of the market favorite. While the earlier part of the year was dominated by the movement in energy prices, metals and precious metals took the driving seat in the latter part. The market as a whole, then, put in an impressive performance. Will 2006 be another good year for commodities?

Last year and at the beginning of this year, expectations were voiced that commodities would undergo a process of consolidation in 2005. So far, these forecasts have proved correct. But how long will this phase last, and when can we expect the long-term upward trend to continue?

Prices for steel and for the raw materials needed for the production of steel have in some instances skyrocketed of late. The causes are to be found on both the demand and the supply side. In addition, oligopolistic structures in international mining are also putting pressure on prices. For these reasons there is little prospect that the tight supply situation currently evident on the commodity markets will ease substantially in the next two to three years.

The upswing on the commodities markets that began in 2001 was sustained once again in 2004. Will this year see a continued improvement, or will the markets take a breather?