The world’s commodity supercycle is far from dead – by Ambrose Evans-Pritchard (The Telegraph – December 2, 2012)

Great resource booms usually end abruptly, catching almost everybody by surprise.

The rhythm is as old as mankind. It is poignantly described Nobel laureate Halldór Laxness through the life of an Icelandic sheep farmer a hundred years ago in Independent People, harrowing because his ruin is so utterly human.

Studies by the World Bank covering two centuries of data sketch a pattern of 10-year supercycles, followed by a slide for the next 20 years or so as excess investment leads to a flood of supply. The long bear market can be cruel for those hanging onto to resource stocks, convinced that the rebound must be nigh.

Mark Ryder, Australian investment chief for UBS, says we are reaching just such an inflexion point as China’s manic construction phase gives way to more sedate growth, and Europe, America, and Japan take their fiscal medicine. “The commodity super cycle’s end is at hand. The scene is set for a momentum shift,” he said.

This view is daily dinner talk in Australia, a country that lives off iron ore and coal sales to China – and described contentiously by Dylan Grice from Societe Generale as “a credit bubble built on a commodity market built on an even bigger Chinese credit bubble”.

It is starting to take hold as the new consensus in the City where funds are keeping a close eye on the mining trio of BHP Biliton, Rio Tinto, and Brazil’s Vale. All three are battening down the hatches as hopes fade that this year’s 23pc fall in iron ore prices will soon reverse. Rio is cutting $5bn in spending by 2014. Vale is expected to pare back its $40bn investment plans next week.

But it is a report by Citigroup’s Edward Morse that has most rattled resource. He claims that America’s shale gas revolution — which has cut US natural gas prices by 70pc — is a taste of what will happen across the gamut of commodities as vast investment comes on stream. The inference is that parking money in “long-only” resource index funds — worth $250bn — has become a mug’s game.

It is the classic pincer movement of supply and demand, with Chinese imports of iron, copper, coal, and oil cooling at just the wrong moment. “It is now clear the commodity super-cycle is over. The overall slowing and the restructuring of the Chinese growth model should mark a watershed in global commodity markets. For many industrial metals, China, in fact, was responsible for all of net global demand growth after 1995,” he said.

To be precise, China’s share of total world demand in 2011 was: soya (27pc) cotton (38pc), aluminium (40pc) iron ore (40pc), coal (42pc), zinc (42pc), lead (43pc), copper (43pc), and lean-hogs (50pc).

Mr Morse says China’s growth will slow from 10.5pc to 5.5pc by 2020 – Credit Suisse thinks it could be as low as 4pc, and the US Conference Board 3.7pc – but the crucial twist is that appetite for resources will wane as the Politburo calls time on history’s greatest building boom in history and opts instead for a modern, sleek, consumer and service-driven economy.

This then is the argument of the bears, one that many of us will have to grapple with over coming months. If they are right, it will churn up the global investment landscape, rippling through the currency markets. Much of the London Stock Exchange is a resource play, either directly or through Russian and Kazakh companies and such-like that feed off commodity economies. But are they right?

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