Pedal to the metal – by Simon Wright (The Economist – November 18, 2013)

The commodities supercycle is not over

Commodities are a cyclical business. And the limp performance of metals and the bulk commodities (iron ore and coal) over the past couple of years has resembled a unicycle rather than the superbike of the preceding years. Growth has slowed in China, the destination of most of the world’s exports of iron ore, copper and other metals, as well as increasing quantities of oil and corn. Many analysts have declared that the China-driven commodities “supercycle” has run out of road.

That may be premature. There are reasons to think that in 2014 and beyond the demand doomsayers will have to rethink their downbeat assessment of the resources the world will require. And forecasters predicting that the supply side will be inundated by new projects, spurred by the high prices of recent years, could also find that the glut is not quite as vast as expected. In 2014 commodity prices should start climbing once again.

Prices were volatile in 2013 but are ending the year little changed, with falls in metals and agriculture offset by higher prices in energy. And prices are still high compared with the last two decades of the 20th century: in real terms commodities change hands for double what they fetched in the 1990s.

As HSBC points out, those who suggest that commodity prices will revert to the mean need to identify where that mean is. Prices were exceptionally low in the 1990s. Excluding oil, they are now at the level of the mid-1970s and are below where they were for much of the first half of the 20th century. Judged by the broader sweep of history, prices are not abnormally elevated.

The pre-millennium lull occurred because the rich world had passed its resource-intense period of growth—many of the bridges, motorways and cities had been built. Investment dwindled. Commodities producers were not prepared for the huge and unprecedented impact on resource demand of China’s rural poor moving to its cities. But what will happen to demand now that China has applied the brakes?

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