Opinion & Analysis: Commodity supercycle is resting between courses – by Michael Power (Business Day Live – March 13, 2013)


Michael Power is a strategist with Investec Asset Management. This article was first published in China Daily.

IN THE world of commodities, the past couple of years should be viewed as an abrasive palate-cleanser between the first course of the supercycle — which ran from 2000 until 2008 — and the main course that is now being prepared.

To understand why, one first needs to re-examine the specifics of China’s recent nominal dollar growth in gross domestic product (GDP) — an extraordinary compound annual growth rate of 18.5% over the past decade. Even now, China’s nominal dollar GDP — that pool of demand that matters most to business — is still growing by about 13% a year.

One also needs to develop a proper understanding of the sheer scale of the compounding effect that is now happening on China’s ever-increasing economic base.

This means not being hypnotised by the annual growth rate, but rather focusing on the sheer quantum of new Chinese dollar demand for commodities that is likely to be created in each successive year over the coming decade. Last year, China added an Australia to its economy; by 2020, it could be adding a Germany every year.

In the coming era, it is important to understand that, just as the character of China’s growth is changing in line with the rise of the Chinese consumer, so too is the mix of that commodity demand evolving.

The winners in the first course are not necessarily going to be the same winners in the main course, though some ingredients — such as oil, copper and thermal coal — will be heavily used in both.

China is not the only kid on the emerging-market block, even if it is at present by far the largest. Collectively, the economies of India, Brazil, Russia and Mexico are still larger than China’s. And by 2020, India, in particular, will be adding significant annual increases to the quantum of demand across a whole range of commodities; it will be roughly where China was in 2000, when the first leg of the commodity supercycle began.

This will mean those commodities that benefited from China’s consumption of its first course — especially iron ore, the ferrous metals and metallurgical coal — will experience revivals as the next tier of emerging giants go through the same industrialisation process as China has recently done.

For investors, the near future is not, however, to be 2000-08 reheated.

This first course of the commodity supercycle was a dish that pleased many tastes, especially for those playing the easy game of piggybacking their investments onto rising prices. The main course is going to be not only a more substantial dish, but a subtler one too, requiring a more sophisticated palate to appreciate.

For the rest of this article, please go to the Business Day Live website: http://www.bdlive.co.za/opinion/2013/03/13/commodity-supercycle-is-resting-between-courses