Commodity bubble ready to pop, warns S&P

Kiwifruit being loaded for export at the Port of Tauranga. Photo / Supplied

Rating agency Standard & Poor's says it is concerned that high international commodity prices are a bubble ready to burst.

However, local economists are more confident on the future of agricultural products that are pumping billions into New Zealand's recovery.

"With commodities prices having been at or near record levels earlier this year, and subsequently subsiding only modestly, Standard & Poor's Ratings Services is naturally concerned that the current situation represents an unsustainable bubble, subject to a sudden correction," the agency said in a report this week.

China, among emerging economies, given the combination of the size of its economy and the steep slope of its growth trajectory, had had a far more significant role in driving appreciation of commodities prices than any other country.

"And if current market conditions in commodities do represent a bubble, a significant deceleration or downturn in China and other emerging economies could ultimately cause the rupture."

Modest subsidence of prices during the past two months was partly attributable to market expectations of slower growth in China, the report said.

Standard & Poor's said it expected China would sustain high growth rates during the next few years, albeit perhaps not as high as in the recent past.

The ANZ Commodity Price Index increased marginally in May to a new record high, while the dairy products index fell 1.3 per cent.

ANZ economist Steve Edwards said the rate of increase in the commodity price index had not been sustainable. "If you're going to draw a sweeping conclusion, you could say that there was a bit of bubble happening with commodity prices, but how much it would retrace [is] a big question," Edwards said.

"Whether it's just a structural lift up, which we think is the case in terms of New Zealand's goods, that the world is getting richer and demanding more by way of proteins and we've got that sort of commodity that they wish to purchase."

Hard commodities had more business cycle influence in the price and a greater speculative element.

"We've got our fingers crossed ... that we've seen a structural and longer-lasting shift up [in New Zealand's commodities] and we're hoping that it will be the case that at least for quite a period of time yet we will benefit from these higher prices."

BNZ senior economist Craig Ebert said it was too hard to know if there was a commodity bubble with so many factors at play.

There was also fundamental demand, with strong growth in emerging markets, and a range of supply disruptions, particularly in food.

New Zealand's prices had rebounded, including dairy and forestry.

"I think the perception here is that we are less vulnerable to a commodity price correction give that the perception is tilted towards to corrections mainly playing out in some of the industrial products."