As concerns surrounding the inflationary impact of central bank intervention recede, investors have begun to unwind commodity-based inflation hedges, resulting in a flood of outflows from commodity funds.
It is a trend that could accelerate, with some analysts warning that the commodities super-cycle may finally have ground to a halt. And that could leave prices subdued for the next decade.
“Futures markets suggest no respite to commodities correction for the time being. The evidence seems to be clear – the commodity super-cycle is over,” noted Taimur Baig and Jun Ma, DB’s chief economists in a recent report.
In addition to a cyclical shift, with demand from emerging market proving to be less vigorous than first thought, Baig and Ma cite a range of structural factors, including muted demand projections, substantial oil supply shocks and adoption of alternative energy sources in China.
However, they view developments in shale oil and gas extraction as the big game-changer in keeping natural gas prices dampened. Shale extraction is expected to represent more than 50% of US production by 2040, up from just 10% in 2007, according to projections from the US Department of Energy.
But not everyone is ready to call time on a super-cycle that saw broad commodity indices triple between 2002 and 2008 as demand for resources from China and other emerging markets surged.
“Super-cycles can last decades, and historically they have. The reasons why they happen are varied, but this one is driven by population growth and urbanisation and those drivers haven’t gone away,” said Michael Haigh, head of commodities research at SG.
“We will go through periods of subdued price performance, but we don’t see the sort of crash where prices hit the cost of production and stay there for decades.”
The All Commodity Price Index published by the IMF is down 5% so far this year after gaining more than 300% through the 2002-2008 boom. The latest price projections point to an 11% decline by 2018, with the biggest falls expected in energy, followed by food and metals.
“We’re hearing a lot about the end of the super-cycle, and although commodities are under some pressure, it seems to be driven by the sluggish nature of the recovery in the US and China,” said Nitesh Shah, research analyst at ETF Securities.
“We’re going through a soft patch, but the super-cycle is very much in place – China is bringing an additional 400m people into cities in the next 10 years, which is more than we saw in the last 10 years.”
While assets under management in exchange-traded products and commodity hedge funds have plummeted over the last year, institutional flow remains robust according to dealers.
“Institutional flow hasn’t died away but investors aren’t going passively long in commodities anymore. We continue to see flows into tactical commodity investments. There’s a lot of interest in alpha plays,” said Haigh.
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