The commodities “supercycle” is dead. If anyone was still in doubt about whether the era of ever-rising prices driven by rapid Chinese growth was over, events of the past week have surely dispelled it.
The dollar rally after the Federal Reserve’s hints about tapering its “quantitative easing” programme, together with fears about a liquidity crunch in China, have sent a ripple of fear through the commodities industry.
So what should investors do about it? The answer may be less obvious than it seems. Most commodity prices have already fallen dramatically. Since their respective peaks in 2011, copper prices are down 35 per cent, iron ore prices have fallen 40 per cent, and gold has tumbled 36 per cent.
“People have generally been positioned for the slowdown in materials demand,” says Kamal Naqvi, head of commodity sales at Credit Suisse. “But we’re getting towards the end of that particular trade. For metals to be a conviction short from here, clients are waiting on confirmation that demand is worse and/or that supply is better than people have been factoring in.”
The shares of commodity producers have been under even more severe pressure. Anglo American shares are down 64 per cent from their 2011 peak; Vale is 45 per cent lower; and Kazakhmys has lost 85 per cent.
As Jake Greenberg, metals and mining specialist at Jefferies, observes: “If you’re investing now based on the end of the supercycle theme, you might be a little bit late to the party shorting mining shares.”
What is a commodity bear to do? Some traders and hedge fund managers are now looking for more arcane opportunities to profit from the end of the commodities supercycle.
Scott Hobart, portfolio manager at HFZ Capital Management, a Hong Kong-based hedge fund that focuses on the commodities sector, argues that some industries and economies that have profited from the commodities boom have so far escaped the precipitous falls seen in metals prices and miners’ shares.
And yet, the end of the supercycle is likely to affect some industries even more acutely than mining. As miners’ profits fall, their investments in new mines are likely to fall even faster – indeed, much of the rhetoric from mining industry executives over the past year has focused on paring back capital expenditure.
Australia’s Bureau for Energy and Research Economics recently estimated that resource projects worth A$150bn had been cancelled or delayed in the country in the past year. Citigroup is forecasting that global capital expenditure across the mining industry will be 30 per cent lower by 2015 than it was last year.
That bodes badly for companies whose business is to service the mining industry: from the makers of shovels or drill bits to the suppliers of temporary housing in the Australian outback.
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