End of commodity supercycle?

Commodity price falls across the board — excepting crude oil and its derivatives — over the last few months have set off a lively debate among academics as to whether the commodity supercycle that began in 2000 is over. Not on many subjects, differences of opinion could be as sharp as on the life of the last one in a series of commodity supercycles. Interestingly, those who have studied the phenomenon over the last two centuries are too in disagreement over the length of expansionary phase before commodity price decline starts. For example, Morgan Stanley’s Ruchir Sharma has discovered a trend of two decades of price declines followed by one decade of gains. On the other hand, many believe the life of an expansionary phase representing supercycle could be anything between 15 and 20 years.
The much-acclaimed author of Breakout Nations: In pursuit of the Next Economic Miracle, Sharma has said in an article in the Financial Times newspaper, “over the past 200 years, real commodity prices have declined along a predictable path: one decade up, two decades down. We have just finished one decade up. The path of oil and copper is an exception, but real prices have stayed broadly flat, with no evidence of supercycle.” Whatever his views on copper, the fact is the red metal is down to around $7,580 a tonne from over $1,000 a tonne in early 2011. As for crude oil, unlike any other commodity it is as much subject to forces of demand and supply as to complexities of geopolitics. In any case, academics are split on supercycle longevity. But the point raised by Sharma that ‘commodity mania’ puts community fortunes in mostly unproductive hands will find wide acceptance. Mania it is, as the world has seen the birth of any number of commodity investment funds in recent years facilitating participation of people enticed by the prospect of making quick fortunes but with no knowledge of the trade. According to Sharma, money garnered by commodity funds in five years to 2011 had more than doubled to over $400bn. He has a distaste for the commodity bubble for strong economic reasons as also for the commodity chase finds wealth falling in unproductive hands.
Whatever be Sharma’s view on the subject, the commodity supercycle standing for a very long-term surge in prices may or may not have run out of all its steam. Unarguably, bulk commodities and metals subject to stagnation in the two decades preceding 2000 subsequently started experiencing regular spikes in prices on the back of unprecedented demand growth in emerging markets. If China stood out for its ravenous appetite for raw materials, a big market opened up for their suppliers, benefiting emerging economies like Brazil and Russia. In the beginning of the cycle, demand for raw materials was ahead of supply and buyers in China and India (for coking coal) were constrained to pay ever rising premium prices. Raw materials price spikes left huge surpluses with the mining groups leading them to invest heavily in capacity expansion to take care of the world hunger for minerals. This is bringing about a balance in demand and supply and as a result, a southward push to prices of raw materials and collaterally to metals.
Many economists say rises and falls in commodity prices happen in waves lasting 20 years. If it is to be accepted that a supercycle has a life of 20 years, then the market is taking a hard look at slowdown in all emerging economies from where bulls in the first place drew inspiration. The Chinese double-digit growth rate is in the past. China has now lowered its 2012 growth target to 7.5% from the earlier 8%. As for India, rating agency
Moody’s says the combination of a broad-based slowdown, a poor monsoon and a government that has “badly lost its way” will restrict the country’s growth to 5.5% this year. Growth deceleration in the two BRIC (Brazil, Russia, India and China) nations will set off a chain reaction. Falls in China’s raw materials import growth rates in particular will be hurtful for resource rich and export dependent Brazil and Russia. Australia, a major supplier of a host of minerals to the world, is also taking a hit. Retreat by bulls is also due to discouraging industrial output data from Eurozone countries. Their main concern is Europe’s manufacturing hub Germany, which after sustaining growth through the European debt crisis is now feeling the impact of Eurozone storm. Bulls are further disheartened by the Bank of England warning that the UK economy will grind to a complete standstill and the US Federal Reserve and European Central Bank refusing to introduce new stimulus packages.