RIP commodity supercycle, 2002-2014 – by Scott Barlow (Globe and Mail – March 11, 2014)

The Globe and Mail is Canada’s national newspaper with the second largest broadsheet circulation in the country. It has enormous influence on Canada’s political and business elite.

Metals prices in China were crushed Monday as the country’s economic numbers continued to drive nails into the coffin of a global commodity supercycle that has enriched so many Canadians since 2002.

Copper prices in Shanghai fell 5 per cent Monday after the government released trade statistics showing an 18.1-per-cent year-over-year decline in exports. The copper price now stands 8.6 per cent below highs hit on Feb. 17. Commodity price carnage was also apparent in iron ore. The spot price fell 8.3 per cent Monday, and is now lower by 20 per cent year to date.

The export data was extremely disappointing to economists who had predicted a 7.5-per-cent increase. Seasonal factors were definitely in play – Chinese New Year celebrations always skew the early-year data. Even so, the number is easily soft enough to confirm the economic weakness suggested by a March 2 PMI report that showed a contraction in manufacturing activity.

Economists expect that China’s gross domestic product growth will reach the government target of 7.5 per cent this year, so at first glance the recent volatility in commodity markets makes little sense.

The falling Chinese yuan and the end of the unwinding of the U.S. dollar carry trade is the likely culprit. It’s getting less attention than the trade numbers, but the People’s Bank of China also paved the way for further weakening in the yuan during the weekend.

The prospects for a sustainably weaker yuan threaten to depress China’s commodity demand even if the country hits economic growth targets.

In the past, commodity trading has been a popular way for Chinese corporations to gamble on a strengthening Chinese currency. Government capital controls prevented most companies from borrowing in U.S. dollars, but resource businesses were the exception.

Chinese commodity businesses are permitted to borrow U.S. dollar funds to buy metals in New York and London. These companies then sell the copper, iron ore or oil in domestic markets, and invest the yuan-denominated proceeds in high-yielding domestic investments.

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