It has been a powerful bull market in commodities. So impressive, many refer to it as “the super-cycle.” Driven by insatiable demand from China and other developing nations, cheap money courtesy of the Fed and lack of investment in the previous cycle, commodities have been the place to be for over a decade.
Oil prices are up five-fold since the late 1990s, iron ore is up seven times and most agricultural commodities have more than doubled. Gold, as attested to on AM radio and in late night TV commercials, also enjoyed a bullish ride and is up over five times its price in 2001.
Now, if you believe the commodity bears, this super-cycle is over. Their argument: China’s economy is permanently stuck in a lower growth mode and Beijing’s focus has moved from building infrastructure to stimulating its consumer economy. This will slacken demand for commodities, the argument goes, and put downward pressure on prices. The big investment banks have published unequivocal research supporting this view including Citi’s, “From Commodities Super-cycle to Unicycles,” and Deutsche Bank DB +0.7%’s, “Trading the Commodity Underperformance Cycle.”
This thesis has gathered steam as commodity prices have fallen. Since Labor Day 2011, gold has dropped by 34%. Many other formerly hot commodities haven’t fared much better.
The bear case makes sense if you believe in the theory of reversion-to-the-mean. This is the idea that asset prices, or other price points, inevitably return to their long-term historical averages. An old adage says the cure for high commodity prices is higher commodity prices. The idea is that higher prices will destroy demand, thereby leading prices lower.
The bullish case also calls on history for its thesis. The average length of prior commodity super-cycles is 30 years, according to Professor Ocampo ofColumbia University and others. If history is a reliable guide, then the current cycle is only half over and the super-cycle is just entering a less intense phase.
Bulls point out the super-cycle’s death has been wrongly pronounced before, most notably by the World Bank during the 2008 financial crisis. They argue that recent steep price corrections are already creating new demand for storable commodities and have resulted in production cuts that will reduce supply. In just Australia alone, according to the Bureau for Energy and Research Economics, resource projects worth $146 billion have been cancelled or delayed over the past year.
Bulls maintain spare capacity is tight and geo-political supply risks are increasing. They say the potential effects of China’s shift in policy have been overblown and global growth and inflation rates likely are bottoming. As the global economy improves, so too will commodity prices.
Our analysis considers both these theories and what it means for the world if the super-cycle is indeed over. Mining companies, oil and gas groups, and agribusinesses would all be adversely affected. There would be a negative domino effect for the companies that serve these industries including commodity exchange operators, equipment makers, portable housing manufacturers, and transportation groups. In the same vein, countries directly dependent on natural resources for their prosperity including Australia, Chile, Canada, Brazil and Saudi Arabia are fair game for reassessment. Are they doomed given the potential for a negative multiplier effect? Does Saudi Arabia tumble due to civil insurrection caused by economic depression? Does the Canadian loonie go to something like 50 cents?
In diversified economies like the U.S., the end of the super-cycle would create winners and losers. Implicit in the death of the super-cycle argument is that globalization is dead. This is important to commodity prices since they have risen in lock-step with the removal of barriers to trade over the last few decades.
For the rest of this article, click here: http://www.forbes.com/sites/greatspeculations/2013/07/09/reports-commodities-bull-market-demise-may-be-greatly-exaggerated/