Are Contracting Global Markets Ending the Commodities Supercycle?

Commodity prices, which have been rising for the last decade, fuelled mainly by growing demand from China, are slowing down. “China’s growth is downshifting to a lower plane, its very commodity-intensive phase of growth is coming to an end,” Ruchir Sharma, Morgan Stanley’s head of emerging markets, said in a recent interview. “This to me marks a big decade of increase in commodity prices coming to an end.”

Others echo Sharma’s view. Citigroup said recently that commodity price gains may be coming to an end as production of raw material rises in response to higher prices and declines in Chinese demand. “China’s increasingly differentiated impact across commodities is providing abundant evidence that the coordinated commodity super cycle of the last decade may be coming to an end,” Edward L. Morse, Citi’s global head of commodities research, said.

This month Swiss bank Credit Suisse cut its forecast for China’s 2012 economic growth to 7.7 percent, becoming the latest bank to lower its estimate following the country’s economic slowdown. Even so, the bank’s estimate is higher than the Chinese government’s target of 7.5 percent growth this year.

In a paper published earlier this year by the United Nations Department of Economic and Social Affairs, two economists argue that supercycles tend to span long periods of time, with upswings of ten to 35 years generating 20- to 70-year complete cycles. The authors also comment that supercycles are observed over a broad range of commodities, mostly inputs for industrial production and urban development of emerging economies.

While the commodity price hike of the early 21st century has commonly been attributed to BRIC economics, and particularly China, the authors believe it can only continue “if China and other major developing countries are capable of delinking from the long period of slow growth expected in the developed countries.”

Morgan Stanley’s Sharma said, “I suspect that we’re headed now for two decades down as far as commodity prices are concerned. This is the sunset of the big commodities super-cycle.” He added that the 200-year history of commodity prices shows a repeated trend of two decades of price declines followed by one decade of price gains.

BHP sees price increases ending

BHP Billiton (ASX:BHP,NYSE:BHP,LSE:BLT), the world’s top  miner in terms of revenues and market value, declared last month that the rise in commodity prices is nearing an end.

“The tailwind of high commodity prices has contributed to record growth in the sector,” Jac Nassar, the chairman of the company said. “Now we have a period where those tailwinds are moderating and we expect further easing over time. Where the industry previously lacked investment opportunities and choice, it now has more projects than cash flows. All of us in the industry are having to make choices.”

Not over yet?

However, it is still uncertain as to whether the supercycle is over. Various teams at Credit Suisse, for example, are in disagreement about this question. Dong Tao of Credit Suisse’s economics team said in a recent report that “China’s demand super-cycle for commodities is over.” His colleagues on the China Basic Materials Team echoed this view.

In the same report, which states that the “the Credit Suisse Securities Research department has had a healthy debate about the outlook” for China, the bank’s global commodity team said, “[a]lthough the intensity of commodity growth is likely to slow over time, we expect this to be a gradual process, not a step change, this year. Still, as a result of strong Chinese demand, coupled with a gradual recovery in the West, global commodity prices are likely to, on average, stay well above the levels seen in the 1980s and 1990s – we believe that the super-cycle has further to run.”

Securities Disclosure: I, Karan Kumar, hold no direct investment interest in any company mentioned in this article.