A peak may be in sight for commodity prices
ASSIGNING analysts to cover the humdrum world of commodities and mining was once investment banking’s punishment for low-flyers or copybookblotters. Then China’s pulsating economy and appetite for raw materials sent the prices of industrial metals and bulk commodities soaring. It turned watching the dismal world of copper, zinc and nickel, and the mining firms that dug them up, from a role tantamount to constructive dismissal to glamour.
Can it last? Signs that China’s economy is coming off the boil—recent figures put annual growth in the second quarter at a mere 7.6% compared with the double-digit rates of the past few years—have led some to suggest the commodity boom is over and prices are likely to crumble. That prognosis looks premature.
The past decade has been a remarkable one for metals and bulk commodities—iron ore and coal. Consumers, desperate to get their hands on raw materials, paid well over the cost of production as demand outstripped supply, which was constrained by years of underinvestment by mining firms. Many analysts talked of a “supercycle”, a long-term surge in prices lasting for decades on the back of Chinese demand.
Chinese urbanisation has been the fundamental force behind that demand. Until the start of the millenium China, the world’s biggest producer of many commodities, was largely self-sufficient or even a modest exporter. Economic reforms have turned it into a manufacturing and exporting behemoth, and have prompted a vast movement of people away from the countryside to the cavernous factories and sprawling megacities of the new China. The housing, roads, railways and infrastructure supporting this shift required massive imports of minerals.
China’s steel production grew by 16% a year between 2000 and 2011. Around half the world’s steelmaking raw materials and two-fifths of its copper and aluminium now disappear down the dragon’s maw. The price of copper, which had fallen by 0.8% a year in the 1980s and 1990s to reach little more than $1,300 a tonne a decade ago, exceeded $10,000 a tonne in early 2011 and still stands at around $7,500.
A slowdown in China has led people to wonder whether the supercycle is over. The evidence suggests that it has reached a peak. Academics probing supercycles over the past 150 years reckon that the expansionary phase lasts between 15 and 20 years. Most analysts put the start of the most recent cycle around 2000 (see chart 1). HSBC, which thinks this cycle is just seven years old, concedes it faces the onset of “creaking middle age” and that a long senescence might follow. Ruchir Sharma of Morgan Stanley sees in a 200-year history of commodity prices a repeated trend of two decades of price declines followed by one decade of gains.
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