Global action helping commodity prices

Action to stimulate the global economy is helping restore to confidence and halt a dramatic slide in international commodity prices.

The ANZ Commodity Price Index for dairy produce gave a small bounce last month, rising 2.8 per cent, having previously fallen by more than half from a peak in late 2007.

Broader commodities indexes for the three months ended March were down nearly 7 per cent, although the average loss in the previous two quarters had been 37 per cent and 27 per cent respectively.

The global financial crisis pushed investors towards the relative safety of cash and bonds, forcing commodity prices down. Some economists say this process could now be winding down.

ANZ National Bank economist Philip Borkin said market confidence was an important component of any part of the economy.

A meeting in London on Friday of the G20 nations agreed to give US$1 trillion to the International Monetary Fund and other bodies to help tackle the economic crisis.

"You need confidence for things to improve, and we are starting to see some signs that confidence is improving with the G20 announcement [and] the packages from the US. Markets have taken quite kindly to those over the last couple of weeks to a month, and as a result we're seeing things like riskier assets become more appetising for many investors," Borkin said.

However, some of the weak demand suggested prices were unlikely to take off. "It's more likely just to be a bit of stabilisation, I think, rather than reflation."

The future of global prices depended on the sustainability of recent confidence.

"If it remains, then potentially we've seen the base in commodities and things are likely to stabilise. But it really is a case of 'is there any more bad news to come?' I suspect there are still a few skeletons in the closet that do need to come out."

ASB Bank chief economist Nick Tuffley said there was perhaps less pessimism about the direction of the global economy.

"There's been a lot of talk in some quarters of green shoots starting to appear, and that's probably partly behind it, but also on the industrial side of things we have seen some pretty savage reductions in industrial activity late last year and the early parts of this year, and at some point you are likely to see some recovery in that industrial activity."

The downturn in commodity prices last year related partly to a cutback in orders as companies with high inventories found it more difficult to sell stock and a slight disruption to trade when it became harder to get credit.