5commodity cycle-april 2013

8/12/2019 5Commodity Cycle-April 2013

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Wheels Are Falling Off the SupercycleBy LIAM DENNING

Have we fallen off the cycle or is the bike broken?

Since 1998, commodities have been in a bull marketthe so-called supercycle,

where sur in demand for raw materials eclipses supply, !uicin prices to abnormalhi hs"

#ately, thou h, it has been all downhill for commodities" $n %or an Stanley &s%S -'"()* recent earnin s call, finance chief +uth orat characteri ed this weakness ascyclical rather than structural" .ut a more fundamental shift appears under way"

/wo thin s underpinned the upswin in industrial commodities" 0irst, low pricesdiscoura ed investment in new oil fields and mines throu h most of the 198's and199's" Second, demand in emer in markets, especially hina, !umped"

2either factor will hold this decade in the way they did durin the last"

Hi h prices have encoura ed investment in new supply" /he most obvious e3ample isthe rebound in 4"S" oil-and- as production" 5lobally, spendin on oil-and- asresources is forecast by consultancy 6HS Herold at almost 7('' billion this year, more

than four times the level of 1' years a o"

Somethin similar is happenin with industrial metals and minerals" aterpillar / -'" 8* !ust cut its uidance, citin weak demand for minin e:uipment" ;3cesscapacity has wei hed on aluminum for years and has started hittin iron ore"

#ately, it&s been all downhill for commodities"

2ow, copper is startin to feel the effects" .arclays . + "#2 -'"9


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throu h ='1), reversin the deficits of ='1' and ='11" 6nventories of copper arebuildin , and it is noteworthy that >" " %or an hase and others now want to launchcopper-backed e3chan e-traded fundsone way of wrin in profits from piles of idlemetal"

>ust as supply accelerates, rowth in demand has softened" Slu ish rowth and

enhanced fuel efficiency, especially in the 4"S", mean the 6nternational ;ner y ency e3pects oil demand in advanced economies in ='1( to be lower than in 199("

0or oil bulls, hina is the reat offset to this" 6n the decade ended in =''(, itaccounted for =9* of oil-demand rowth" /wo other centers of rowth in oil demandare the former Soviet 4nion and the %iddle ;ast" #ookin to ='1(, the 6; e3pectstheir combined demand to rise faster than hina&s" et these two re ions& economiesare heavily tied to ener y e3ports, so estimates for their oil consumption rise and fallwith hina&s fortunes"

$il consumption in hina over this decade is unlikely to repeat the sur e of the lastone, when it almost doubled" 6n that earlier period, hina burned between one and1"< barrels of oil per 71,''' of real ross domestic product, accordin to +aymond>ames" .y ='1=, that had slipped below one barrel"

hina&s 5@ rowth has slowed as e3port markets, especially ;urope, haveweakened" 6n addition, .ei!in is pushin to move the economy away from fi3ed-assetinvestment, currently half of 5@ , toward consumption, which accounts for only about

one-third" /his shift will represent a fundamental restraint on rowth"

%etals demand could fare even worse in this scenario, iven how closely it is tied tohina&s construction bin e" 0or e3ample, between =''< and ='1', hina accounted

for 1


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0unds trackin inde3es such as the SC 5S 6 present the easiest way to buy abasket of raw materials, often in the form of futures contracts" roblem is, unlikestocks, commodities yield nothin " 6ndeed, the process of sellin e3pirin futurescontracts and buyin new ones to maintain positions can impose substantial costs"

/he total return on the SC ones-4.S 4.S2"DE F'"91* over one-, two- and five-year periods"

$n a si3-year-to-1

5commodity cycle-april 2013

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