Commodity supply constraints and demand from emerging markets mean it’s premature to talk about the death of the super cycle that brought a longer-than-average period of rising prices, McKinsey & Co. said.
Energy, metal and agricultural prices that more than doubled since 2000 are still close to highs reached before the financial crisis, even after commodities from gold to wheat dropped into bear markets, McKinsey said in a report today.
The surge in raw-material output in the past two years and signs of cooling economic growth in China, the world’s biggest consumer of everything from cotton to zinc, prompted Goldman Sachs Group Inc. and Citigroup Inc. to say the super cycle ended. McKinsey said producers are being forced deeper into remote areas to secure supplies that require increasingly sophisticated technology to extract as consumption expands.
“When we look forward, we see a separation between new technology and productivity on the one hand, and emerging-market demand and supply constraints on the other,” Fraser Thompson, a senior fellow at the McKinsey Global Institute, said in a telephone interview from London. “We don’t want to bet against technology, but what we think often gets overlooked is the scale of the challenge we’re facing.”
The Standard & Poor’s GSCI Spot Index of 24 raw materials has dropped 2 percent this year. Since 2000, the gauge posted only two annual declines.
Price Floor
Production expenses continue to escalate for many commodities, according to the report.
Arable land in China is being built over as the nation urbanizes while in Brazil prices for farmland have jumped as much as sevenfold in some regions over the past decade because of rising global food demand, stricter environmental laws and expansion of protected areas.
McKinsey cited offshore oil fields that require more sophisticated equipment and mineral resources developed in politically unstable regions.
While there are no imminent shortages, higher marginal costs “appear to be pervasive and put a floor under the prices,” McKinsey said. Volatility is increasing amid evidence of a “structural supply issue,” according to the report.
For the rest of this article, click here: http://www.bloomberg.com/news/2013-09-25/commodity-constraints-show-super-cycle-endures-mckinsey-says.html