The super cycle in commodities has come to an end, according to researchers at Citi, who downgraded several mining stocks on Monday as metals prices have continued to decline since the start of the year.
Gold fell below the $1,400 an ounce level on Monday, its lowest since March 2011. This follows a decline of 5 percent on Friday, its biggest one-day slide since 2008. The precious metal has slipped around 14 percent so far this year, after a 400 percent mega-rally over the last 12 years.
Silver, platinum and palladium have also been hit by heavy selling and copper’s gains in recent weeks have been wiped out in the face of weak Chinese data. Oil has also hit multi-month lows with futures falling more than $2 on Monday.
“Citi expects 2013 to be the year in which the death knolls ring for the commodity super cycle, ushering in a new decade of opportunities based on how individual commodities will perform against one another and against broader market indicators such as equities or currencies,” research analysts said in a note on Monday.
“The forecast prices of key base metals of aluminum, copper and nickel have been cut between 5-10 percent for 2013 and between 8-13 percent for 2014. The gold price has seen the biggest change with a cut of around circa 13 percent for the next three years.”
China’s disappointing gross domestic product (GDP) data released on Monday led to concerns about the outlook for the world’s second largest economy and weighed significantly on mining stocks. China’s economy grew an annual 7.7 percent in the first quarter, below the expected 8 percent level and down from 7.9 percent in the previous quarter.
A report from the Financial Times showed that the world’s top commodities traders have pocketed nearly $250 billion over the last decade, riding a commodities super cycle caused by the industrialization of China and other emerging countries. These boom years for China have now been superseded by uncertainty, according to Citi.
“Chinese overcapacity remains an issue, as the investment-led boom over the past few years increased plant capacity,” it said.
“A tighter financing environment awaits local governments due to the need to contain the expansion of local government debt and reorient the economic model.”
Steel, cement, petrochemical, non-ferrous metals and thermal coal power could all be affected due to this belt tightening, according to Citi, which slashed price targets for a number of U.K. blue-chip mining stocks on Monday, keeping Rio Tinto as the only “buy”.
Randgold Resources, Lonmin, Rio Tinto, Fresnillo and Kazakmys all posted heavy declines on Monday morning in London trading.
“[China] at a government level, they have got no funding problems(…) When we get down towards the more, dare I say it, private sector, yes, there probably is somewhat of a concern in terms of the amount of debt that is starting to accumulate inside of China, outside of government hands,” David Lennox, a mining analyst for Fat Prophets told CNBC.
“The authorities will probably be able to keep any real distortion or movement from a debt point of view fairly much in control, because they have got a number of policy instruments available to them,” he said, adding that debt issues are probably a perception rather than a reality at this stage.
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