Commodity Super-Cycle and Decline

http://www.ft.com/

An ill wind is blowing across UK mining stocks, which are trading at around a five-year low. Stocks, however, are offering tempting dividend yields and some momentum-driven traders are predicting the cycle is about to turn. Volatile mining stocks have long been popular with individual investors with a more aggressive approach to risk. But is now the time to buy in, or does the sector remain too unpredictable for even the very brave?

The first thing private investors should be aware of is what is happening in China. The fall in mining shares can be blamed on slowing growth in the world’s second-largest economy, which has historically been the major global consumer of most commodities, from copper to cotton.

The China slowdown is not miners’ only problem. For several years until around 2012, the industry invested heavily in new mines, then greatly increased their production of commodities such as the steelmaking material iron ore.

So metals prices have been falling.

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http://www.mineweb.com/

Not all commodities are equal. Some will bounce off and others will take a beating from China’s shift to consumption.

JOHANNESBURG – Fears of a significant slowdown in China’s economy, the second largest in the world, have whipped markets into a frenzy this year. As global equity markets opened on August 23, one by one and region by region, key indices flashed red.

This, as the after-effects of China’s Black Monday – in which the country’s benchmark Shanghai Composite Index extended its losses to post its steepest one-day decline of 8.5% since the 2007 financial crisis – was ripping through world markets and prompting historic single-day sell-offs across the board.

Since then, continued volatility in Chinese markets, tempered somewhat by state intervention, which Goldman Sachs values at $236 billion over three months, has left investors across the globe uneasy.

Last year, the country’s economic growth slowed to 7.4%, its lowest level in more than 20 years. The extent to which the economy will slow this year remains a mystery –

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http://www.ft.com/

The Bank of England has asked British financial institutions to reveal their full exposure to commodity traders and falling prices of raw materials amid concerns over the impact of the oil and metals slump.

The Bank of England’s Prudential Regulation Authority, which was set up in 2012 to ensure the “safety and soundness” of banks in the wake of the financial crisis, sent the requests to the UK’s big banks in the past week, according to three people with direct knowledge of the matter.

The PRA move that mirrors similar inquiries it made earlier this year about the banks’ exposure to Greece and to China, was prompted by a sharp drop in the shares of Glencore, the biggest publicly listed trading-house-cum-miner at the start of last week.

It was not provoked by any immediate concerns of a default, a person familiar with the matter said, but it was checking that banks knew what their exposures were to individual commodity houses and that they had examined the wider knock-on effects if a large commodity trader was to collapse.

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http://www.bloomberg.com/

Even with commodities mired in the worst slump in a generation, Goldman Sachs Group Inc., Morgan Stanley and Citigroup Inc. are warning bulls that prices may stay lower for years.

Crude oil and copper are unlikely to rebound because of excess supplies, Goldman predicts, and Morgan Stanley forecasts that weaker currencies in producing countries will encourage robust output of raw materials sold for dollars, even during bear markets. Citigroup says the sluggish world economy makes it “hard to argue” that most prices have already bottomed.

The Bloomberg Commodity Index on Sept. 30 capped its worst quarterly loss since the depths of the recession in 2008. The economy in China, the biggest consumer of grains, energy and metals, is expanding at the slowest pace in two decades just as producers struggle to ease surpluses. Alcoa Inc., once a symbol of American industrial might, plans to split itself in two, while Chesapeake Energy Corp. cut its workforce by 15 percent. Caterpillar Inc. may shed 10,000 jobs as demand slows for mining and energy equipment.

“It would take a brave soul to wade in with both feet into commodities,” Brian Barish, who helps oversee about $12.5 billion at Denver-based Cambiar Investors LLC. “There is far more capacity coming on than there is demand physically. And the only way that you fix the problem is to basically shut capacity in, and you do that by starving commodity producers for capital.”

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http://www.reuters.com/

(Reuters) – Slumping commodity prices pose a serious challenge to economic and political stability in developing economies across Latin America, Africa, the Middle East and Asia.

According to the United Nations Conference on Trade and Development, 94 developing countries depended on commodities for more than 60 percent of their merchandise export revenues in 2012/13.

Sixty-three developing economies were considered “extremely commodity dependent” with commodities accounting for more than 80 percent of export earnings (“State of commodity dependence” April 2015).

Most commodity-dependent developing countries rely on raw material exports for more than 20 percent of their entire economic output, in some cases rising to more than 50 percent, according to UNCTAD (“Key statistics and trends” June 2015).

During the boom years, the value of commodity exports from developing countries jumped from $2.0 trillion in 2009/10 to $3.2 trillion in 2012/13, mostly as a result of higher prices, which gives some idea of the scale of revenues now at risk.

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Steve Johnson is chief investment officer of Forager Funds Management.

China’s economy had me puzzled back in 2011. My understanding was that the country’s growth miracle was founded on exporting cheap goods and labour to the rest of the world. That, presumably, would make it highly dependent on global GDP growth.

Yet as the United States and Europe – which combined, make up some 50 per cent of global GDP – were muddling their way through the worst recession since the 1930s, China was reporting economic growth of well in excess of 10 per cent per annum. How is it possible for an export-driven economy to grow at double-digit rates when its main trading partners are shrinking?

As an Australian fund manager, I needed to answer that question. China’s hectic growth was driving voracious demand for Australian resources. That, in turn, was propping up our economy and sending resources stocks (we didn’t have one in the portfolio) to stratospheric heights.

My research uncovered all the usual bull and bear arguments. The bulls argued that China’s migration of its population from unproductive peasants to educated city-dwellers had many decades to run, and that China’s GDP per head was still a small fraction of that in the US or Japan.

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