A large group of men stand huddled together, gazing intently at screens, hands occasionally raised in the air, shouting out numbers, with the odd expletive thrown in for good measure.
And so another day’s trading begins in the “pit”, or floor, of the New York Mercantile Exchange, the home of the city’s energy and metal trading in downtown Manhattan.
The number of traders on the floor is a far cry from what it was 10 years ago, with the advent of electronic trading meaning more and more people now trade from offices or even the luxury of their own homes.
More recently, the commodities – or raw materials – market has undergone a different kind of change – what many are referring to as the end of the “super-cycle” – the run of gains seen in prices.
The price of gold, for instance, soared to record highs above $1,900 an ounce in August 2011, and as recently as October 2012 was trading at about $1,800. But since then it has dropped off to about $1,400.
Last week, commodity prices fell across the board. Gold, oil, copper and aluminium were all sharply lower after China’s economic growth in the first quarter failed to live up to market expectations.
China has helped fuel demand for commodities in recent years, sending prices up, but fears that slowing growth there will hit demand is now having the reverse effect.
China is the “wildcard” because of its sheer size, according to Jeff Grossman, president of BRG Brokerage and a seasoned trader of 33 years.
“The last move that took place downward in crude oil was definitely spurred by a disappointing number for the growth of the Chinese economy.”
Supply response
Most analysts agree it is inevitable that what goes up must eventually come down. “Commodities at the end of the day are cyclical,” says Aakash Doshi, commodities strategist at Citigroup.
“Since the early 2000s up to the great recession you saw commodities rise around 20% on a compound annual growth basis. We think what those heightened prices did was lead to a supply response for commodities that are mined and drilled.” That additional supply could now have a dampening effect on prices, he explains.
“We do think that the super-cycle is eating away, and that we are at the tail end of it.” Ruchir Sharma, head of emerging markets at Morgan Stanley and author of Breakout Nations, agrees. “It takes a long time for supply to come onstream but once it comes it stays for a long period of time.”
After many years of observing the markets, Mr Sharma has a broad rule that he uses when it comes to commodity prices – two decades down followed by one decade up.
“We’ve had that one up decade over the past decade,” he says, pointing to a 600% increase in capital expenditure in the energy and mining sector over that period.
“The supply and demand dynamic we’ve had is now going into reverse.”
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