Commodity supercycle is ending

March 14, 2012 at 2:04 pm Leave a comment

This Wall Street Journal article wrote exactly what i thought of the coming end of the commodity supercycle. As FED will start raising rates by 2014 thus making commodity (a non-income producing asset) less appealing to hold on to/speculate and with China demand slowing down since it is emphasising less on infrastructural investment and more on a consumption model of growth , improving its energy efficiency, adopting a “greener” way of growth and a disappearing demographic dividend, commodity demand whether in terms of real usage or investment purpose will fall.

With new supply being added by mining projects, oil fields and farmland, supply will exceed demand sooner or later.

Falling Off the Commodity Supercycle

“The current commodity supercycle can be dated to 1999. The major commodity indexes all hit their lows for the last 20 years early that year or in late 1998. Since then, the S&P GSCI index has risen fivefold, albeit with some wild swings.

Two things explain this. The first is the recurrent Malthusian fear that the world is exhausting its stock of raw materials—think “peak oil.” Surging Chinese demand has been the major cause of such fear. Between 2000 and 2010, China accounted for 40% of the increase in global oil consumption and 123% for copper.

Cheap money has added fuel to this fire. Very low or negative real interest rates in most major economies have made it attractive to own commodities in anticipation of realizing higher prices later on. That is as true of a hedge fund borrowing at low rates to keep copper in a warehouse as it is for Saudi Arabia keeping some oil in the ground rather than pumping it now, only to invest the proceeds in low-yielding U.S. Treasurys.”

“Chris Watling, who runs research firm Longview Economics, identifies three periods in the past 80 years where episodes of ultra-loose U.S. monetary policy have coincided with upswings in the commodity-price cycle. These encompass the 1930s through the 1940s, the late 1960s through the 1970s, and the current period since 1999.

Based on the historical record, Mr. Watling surmises commodity supercycles—which tend to coincide with equity bear markets—last between 15 and 25 years. By that reckoning, the commodity cycle could start turning in 2014, although his analysis clearly implies a wide range of timing.

Commodity futures, by their nature, look forward to the supply and demand dynamics (and financing costs) of tomorrow. Even before the full implications of changing policies in Beijing and Washington become clear, commodity prices will likely have shifted down in anticipation.”


Entry filed under: Watch your step.

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