The commodities supercycle is alive and well
Jul 24, 2009
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Remember the commodities 'supercycle'? The CRB index, a key commodities benchmark, plunged by 40% last year. Since then, almost no one has been trumpeting a long-term bull market in raw materials. Yet the likelihood is that the supercycle has been "sharply interrupted by the global recession" rather than aborted, as David Fuller says on Fullermoney.com. Indeed the upswing in raw materials, that began in 2001, looks far from over.
Just like equities, commodities tend to move in long-term, or secular, bull and bear cycles. Both are punctuated by short-term, or cyclical, movements. According to Chris Watling of Longview Economics, these secular cycles can be traced back to 1750 – the average bull run has lasted over 20 years, with average cumulative gains of 293%. And the secular bull market of the mid-1960s to the early 1980s was followed by a bear market that ended when the latest upswing began in 2001.
The CRB spot index is well up on 2001 levels, says David Rosenberg of Gluskin Sheff & Associates. It's also interesting to note that during the latest sell-off, "the price of virtually every commodity" bottomed at a higher level than the average price during the last five recessions – even though this contraction was the worst in 70 years. The fact that raw materials posted their "highest cyclical troughs ever" during the worst global recession in 70 years strongly suggests that commodities have found a new, higher "floor". That makes last year's sell-off a "steep correction" – a nasty cyclical downswing – in "the early stage of a secular bull phase".
There's a pattern to secular bull markets – widespread reductions in exploration and production, amid a long bear market, reduce supply. This then lags behind once demand recovers, leading to higher prices. And this time the key factor on the demand side is the industrialisation of Asia. There are now 3.5 billion people wanting to live as we do, whereas during the last secular commodities bull, in the 1970s, demand was driven by Western countries with less than a billion people, notes Fuller. By 2020, Watling believes that the rapidly expanding Bric (Brazil, Russia, India, China) nations alone will account for the majority of global raw materials consumption.
As for supply, the upswing in prices so far has not been enough to make up the supply shortfall induced by the 1980s and 1990s bear market, as Adam Hamilton points out on Zealllc.com. It can take up to ten years to bring a new mine onstream, and in the past seven months, producers have mothballed expansion plans as prices have fallen back, says Peter Krauth on Moneymorning.com. Money printing by central banks, moreover, points to higher inflation once economies recover, and that bodes well for tangible assets such as commodities.
So it looks as though there are still years of upside ahead for commodities. In the short-term, however, prices look vulnerable to further setbacks. According to Philip Verleger of the University of Calgary, the "economic situation isn't getting any better" while global crude oil stockpiles are near highs set in 1997. The glut could send prices as low as $20 a barrel, he reckons. Deutsche Bank thinks rising supplies of copper and aluminium could undermine prices near-term. No problem, says Rosenberg – sell-offs are "long-term buying opportunities".
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