Are we in a commodity super cycle or should you be getting nervous?
The prices of commodities are growing at their strongest pace since the late 1970s. Oil is up more than 450% since November 2001, gold close to 300%. Even the Economist Commodity Index (which excludes oil and precious metals like gold) is up almost 150%. Are these prices likely to come tumbling down any time soon, asks David Crosoer of Glacier Research.
Many of us have been burnt buying assets whose prices are substantially above their long-term average on the basis that this time it will be different. Most of us are old enough to remember the unsustainable increase in technology stocks that took place in the late 90s (the US tech heavy Nasdaq has only made up half its losses of 2000). A good few of us are anxiously following the growth (or lack there-of) in the residential property market after a few years of substantial price increases.
The phenomenon of prices reverting back to their mean is so common that when it doesn’t happen people take notice. Economists refer to prices staying above their long-term means for a sustained period as ‘supercycles’ and some even argue that there have only been two supercycles over the past 150 years. Both occurred when there were major changes to the global economy. We might be in the third now.
China and India are transforming the global economy. According to the IMF, almost half of global growth in 2007 will come from these two economies. And much of the demand for raw materials is coming from China. Chinese demand for copper, nickel, steel and tin is more than half the global demand. These massive changes in global demand are leading analysts to believe that the current spike in commodity prices will not be a temporary phenomenon.
A key factor that has affected the prices of commodities has been the inability of the market to meet demand requirements. In time additional supply will come on stream (mining companies are invested heavily in new projects). There is also the possibility that Chinese economic growth will dip (a halving of Chinese growth to 5% p.a. will put downward pressure on prices). But many analysts do not see either of these factors as altering the long-term upward trend.
South African investors are still getting their heads around sustained higher commodity prices. But such an outcome – with short-term volatility – is not as far-fetched as it once was. The biggest risk to an upward trend in commodity prices is possibly the hardest to quantify – can the world afford the environmental costs of another large-scale industrialization and what will it do to prevent it. Figuring out how to make money from this might be the next big story.
