Commodity Super-Cycle and Decline

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.

China’s leaders are positioning the country for a new era of lower, single-digit growth led more by consumer spending. That reshuffles the lineup of suppliers to the world’s second-largest economy and appears set to push Canadian commodities producers to the margins.

“The commodities super cycle – I don’t know if it’s over, but it’s not looking as good as it used to and it’s going to hurt a major part of our economy,” said Yuen Pau Woo, president and CEO of the Vancouver-based Asia Pacific Foundation of Canada. “We did less badly out of the global recession of 2008-09 on the back of Chinese demand for commodities. That honeymoon is over.”

As demand for resources moderates, Mr. Woo warns that Canada needs to strike a trade agreement with China and better promote its banks, automotive sector and other products that don’t depend on construction.

China’s leaders have been warning its companies for much of the past decade about their over-reliance on infrastructure investment and the need to prepare for a shift to consumer-led growth.

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The National Post is Canada’s second largest national paper.

The Financial Post sat down with emerging markets guru Mark Mobius of Franklin Templeton Investments on Friday to talk about his outlook for global stock markets and commodities. Mr. Mobius is known as one of the pioneers of emerging market investing, and despite the bloodbath in emerging market stocks this year, he still sees plenty of investment opportunities. He also sees potential in gold, which has suffered from its own epic price crash in 2013. Below is an edited transcript from our interview with Mr. Mobius.

Q It’s been a bloodbath for BRIC stocks and economies this year. Is there still opportunity there or should investors move on?

A There’s no question, they’ve bombed.

Overall, however, I think the BRIC countries will definitely have big comebacks, and they’ll do quite well, despite what we’ve seen recently. They’re huge, they have growth, and a lot of companies there are showing us sustained, strong earnings.

Q It’s also been a bad year to be a gold investor. Is the gold story over, or is this just a hiccup for the precious metal?

A There are really two markets in gold. There is the market price, and there is real demand. Market price is influenced by derivatives, by short sellers, by all kinds of actions by traders who are not taking physical delivery.

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http://www.smh.com.au/

Orica was Friday’s high-profile casualty of the resources sector slowdown as its share price slumped in the wake of a profit downgrade, but the resources ”super cycle” isn’t dead. It’s just having a lie down, like a toddler that’s recovering from a sugar overdose.

The commodity price bubble that accompanied China’s infrastructure investment boom won’t be repeated. When China’s demand for commodities surged a decade ago, the miners had been closing down mines and cutting exploration and development for decades. Today China is growing more slowly and in a different way, and the supply pipeline is larger.

The trend that Goldman Sachs global research head Jim O’Neill highlighted in 2001 when he first predicted the rise of the BRICs – Brazil, Russia, India and China – is far from over, though. It’s difficult now to appreciate just how revolutionary was O’Neill’s prediction that emerging nations, and China in particular, would become powerhouses when it was made. He exposed a huge emerging market dynamic, one that dominated economic management in Australia as it played out.

With the benefit of hindsight, it seems O’Neill and Goldman underestimated China’s impact. China has consumed more steel in the past decade than it did in the previous 60 years, and its share of global iron ore consumption has risen from 20 per cent to 56 per cent.

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http://www.reuters.com/

LONDON – (Reuters) – Funds betting on commodity price moves have lost money every month since January, their joint longest losing streak on record, raising more doubts about their ability to make money at a time when the commodity “supercycle” may be over.

The average fund slid 3.58 percent in the first six months of the year, according to a widely watched Newedge commodity index. Funds have only suffered five consecutive losing months once before, in 2002-2003, the index shows.

Hedge funds market themselves as capable of making money in all markets, yet funds trading commodities as varied as gold, grains and gas, have failed to turn an annual profit in the last three years.

The weak performance will put more pressure on the industry to lower fees and introduce clawbacks, which enable investors to reclaim some performance perks paid to hedge fund managers in boom times if the returns they hope to achieve fail to continue.

Worries about cooling demand in key markets like China, and a huge shift in the supply-side from shortage to glut, has sent prices tumbling in recent years, and left many warning that the end of the commodity “supercycle” – the long period of rising commodity prices – is here.

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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.

NEW YORK — When the thirteen members of the investment team at Ballentine Partners LLC sit down each quarter to review their holdings, it is a loud and boisterous affair. Last month, their discussion turned to emerging markets.

The Massachusetts-based firm, which manages $4-billion (U.S.) for ultra-wealthy families, faced a decision: Pare its bullish bet on such countries or stick with it, even as stock prices fell.

The debate circled around the potential dangers for these markets and for China in particular. One agitated analyst pounded the table and called the country’s credit-fuelled expansion a “shell game.”

In the end, the firm’s staff decided to scale back on emerging-markets stocks. “It’s going to be a bumpy time,” said Greg Peterson, Ballentine’s head of investment research. So they decided to act out of caution, he said, to see “how all the issues resolve right now.”

Across the world, many investors are coming to a similar conclusion, watchful and uneasy about the future path of developing economies. In recent weeks, some have fled those markets, sparking marked declines in stocks, bonds and currencies.

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http://www.reuters.com/

BEIJING – (Reuters) – China’s GDP growth slowed in the second quarter to 7.5 percent year-on-year as weak overseas demand weighed on output and investment, lining up a test of Beijing’s resolve to revamp the world’s second-biggest economy in the face of deteriorating data.

Other figures showed industrial output in June rising slightly less than forecast compared with a year earlier, but retail sales increasing more than had been expected.

The latest year-on-year economic growth reading compared with the median forecast in a Reuters poll of 7.5 percent and showed the pace of economic activity easing from 7.7 percent annual growth in January-March.

“These figures are not surprising, adding to signs of downward pressure on China’s economy,” said Zhou Hao, an economist at ANZ Bank in Shanghai. The Australian dollar, which is highly sensitive to Chinese demand for Australian raw materials, rose on relief the GDP numbers were not weaker, following last week’s report of a surprise fall in exports in June from a year earlier.

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http://www.scmp.com/

Runaway prices in commodities markets have ended, but long-term demand for commodities on the mainland is strong

The commodities “super-cycle”, largely buoyed by Chinese buying, may have ended in terms of runaway prices but robust demand is expected to continue. A more benign price outlook would benefit large commodities consumers and importers like China as it would help contain inflation and promote economic growth.

Eugen Weinberg, head of commodity research at Commerzbank in Germany, said: “Price movements in the market indicate an end to the commodities super-cycle. But we do not believe the super-cycle is coming to an end. It’s just taking a break. “Some 20 million people a year move from the countryside to the cities, triggering a huge demand for better infrastructure.”

Michael Haigh, global head of commodities research at the French bank Societe Generale, said: “We do not think the current commodity super-cycle is over, but it is not as super. It is common to have cycles within super-cycles.”

The super-cycle that began around 2002 was driven by a combination of strong demand from emerging nations and low supply growth. Since last year, growth in global demand has weakened as a result of the sovereign debt crisis in many developed nations, while new supply caught up with demand because of strong investment during the latter years of the boom.

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http://www.forbes.com/

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.

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http://www.platts.com/

The current and history’s third commodities super cycle, which began in 2000, is far from over, and the major factors supporting it — population growth and rapid urbanization — would easily stay with us for another 15-20 years, according to a senior analyst at Societe Generale.

While acknowledging that “nobody really defines what a commodity super cycle is,” and the current period might not be “as super,” it is “not uncommon to have cycles within super cycles,” Michael Haigh, SocGen’s New York-based Global Head of Commodity Research, told a media round table in Singapore Monday.

Just as prices go up and down during those cycles within a super cycle, different commodities rise at different times, Haigh suggested, implying not all commodities needed to be consistently high all the time to define a super cycle.

Price controls, the lack of investment, insufficient production and technological innovations are some of the reasons commodities behave differently during a super cycle, he said. Copper is the best commodity to study in super cycles, Haigh said, noting that the base metal continues to trade significantly above its 90th percentile long-run cost of $4,500/mt.

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http://www.bloomberg.com/

Gold will probably extend its decline through 2014, even as the commodity super cycle that’s brought longer-than-average rising prices may persist for a further two decades, according to Societe Generale SA.

Bullion may average $1,150 an ounce next year, said the head of commodities research, Michael Haigh, who in April correctly predicted the metal’s rout. That would be the lowest annual average since 2009, data compiled by Bloomberg show.

Gold is heading for its first yearly loss since 2000 as some investors lost faith in the metal as a store of value after the U.S. Federal Reserve said it may slow asset purchases this year if the economy continues to improve. While Societe Generale is bearish on bullion, it expects the decade-long bull market in commodities to extend for a further 15 to 20 years, driven by rapid urbanization and growing population in countries including China and India, said Haigh.

“It would take something dreadful to happen to make the super cycle suddenly end,” said Haigh, citing risks including a sharp slowdown in China, a scenario the bank doesn’t expect. “If you believe that the third super cycle is a function of population and urbanization, you’re looking at another 15 to 20 years. But it’s not going to be an upward price for all.”

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An air of gloom appears to have descended on commodity markets. Gold, copper and iron ore prices have tumbled sharply from their post-financial crisis highs while returns to investors have proved disappointing.
The S&P GSCI, the most widely followed commodities benchmark, has delivered a -8.9 per cent total return over the two years to June 30.

Amid concerns about a possible slowdown in demand growth in China, the once popular theory that commodity markets would enjoy a “supercycle” of prolonged growth has been declared dead.

But interest among many institutional investors remains healthy, according to leading commodity managers. “We are seeing tremendous interest in commodities from a wide range of investors that want to enlarge their current holdings or to make new allocations,” says Jonathan Berland, managing director at Gresham, a specialist commodities manager with $16bn in assets.

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The Toronto Star has the largest circulation in Canada. The paper has an enormous impact on federal and Ontario politics as well as shaping public opinion.

The alarming social unrest in emerging economies worldwide has a common thread: a sharp slowdown in once-torrid economic growth. The disturbances so graphically depicted in the media often appear to be ethnic or religious clashes or uprisings against autocracy. Those elements are playing a role. But the real driver of discontent in emerging economies is the failed promise of ever-increasing middle-class prosperity.

Most of the estimated 800 daily riots and public demonstrations in China result from factory layoffs. Striking miners in South Africa and street protests against the rule of Russia’s Vladimir Putin had become commonplace even before the recent weeks of rioting in São Paulo and Rio, and the military ouster this week of Egyptian president Mohammed Morsi in a Cairo stricken by blackouts, food shortages and rampant unemployment.

Hero status was once conferred by grateful new middle classes on Vladimir Putin; on Dilma Rousseff, successor to the immensely popular Brazilian president Luiz Inacio Lula da Silva; and on the Turkish president, Recep Tayyip Erdogan. They all are now struggling to regain their political credibility only a year or so since winning electoral mandates.

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