Rapid income growth and economic development in the emerging economies has transformed the global commodity markets. With the available pool of natural resources typically finite in the case of hydrocarbons and metals, or at least inelastic in the short term in agricultural commodities and renewable energy, the supply side has struggled to keep pace with a dramatic increase in demand.

“With tighter exportable surpluses and mounting costs of boosting production in the face of finite supply, commodity prices seem to be on a secular upward trend, in a so-called super cycle. This is also leading to efforts to ensure supply security through strategic reserves and asset acquisitions,” said Jarmo Kotilaine, chief economist of NCB Capital, writing in the bank’s September GCC Economic Monthly.

In addition, the rising presence of institutional investors highlights the growing appeal of commodities in portfolio diversification and yield enhancement, all of which has prompted growing liquidity inflows into the commodity markets. This is causing considerable short-term volatility in prices as speculative investing amplifies the traditional cyclical movements.

“The economic profile of the GCC region leaves it heavily exposed to commodity price fluctuations. While the region stands to benefit from strong oil prices, the arid climate and limited non-hydrocarbons endowments leave it heavily dependent on imports. Although diversification policies are seeking to address these constraints, strategic acquisitions to control price volatility are likely to become increasingly important. The key challenge with all of these endeavors is to ensure their economic viability in the event of significant changes in input costs resulting from possible policy shifts in the face of the widespread use of subsidies,” Kotilaine added.