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Is the commodities super-cycle really over?

25 April 2013 Fiona Zerbst
Fiona Zerbst, FAnews Online Editor

Fiona Zerbst, FAnews Online Editor

For a couple of years now, analysts have predicted that the commodities super-cycle is winding down. The commodities boom has treated investors well, with China leading the acquisition race and driving demand to a large extent (though other developing nat

But with China’s growth slowing down, coal largely in oversupply, and gold, platinum and silver having taken a knock this month, what can we expect from commodities in the future?

JP Morgan’s Michael Camacho, CEO of commodities for Europe, the Middle East and North Africa, believes the super-cycle still has a good decade or so to go, with a ‘mid-cycle pause’ that could last up to 12 months. Some analysts, like Citigroup Global Markets, believe there will be ‘many more losers than winners’ as price declines loom in virtually all base metals, except nickel, and every precious metal outside of palladium. This may be true, but it depends on the extent and nature of one’s exposure.

Supply outstrips demand

“Investors forget that commodities are not a single asset class. Though market sentiment can cause them to react together, each commodity has different supply and demand fundamentals,” says Rob Spanjaard, director at Rezco Asset Management. “If one or two have a vicious down-day, this will drive sentiment and speculative money will move around as everyone panics together.”

Gold and silver felt the pain last week, with a 9% and 12% plunge respectively. Copper also stumbled, along with wheat and coffee. A fall in commodities could, however, be good for the economy, says Spanjaard, particularly when it comes to oil prices, which could push the price of petrol down. He believes the super-cycle could be over because the amount of new supply is overwhelming new demand, even though capital investment continues apace in China.

“I don’t think it’s completely over, but the ‘super’ days of the super-cycle are most likely over,” says trader Simon Brown of JustOneLap. “The bigger issue is that supply has increased massively, hence the reduced prices and reduced profits. Iron ore and platinum are two examples of this – we’ve seen massive supply increases over the past decade and this has grown faster than demand.”

Agriculture seems one of the few bright lights – and again, it could be China that drives demand as it is expected to add 400 million people to its urban population by 2025. China has only 12% arable land and so food pressures can only increase.

Editor’s thoughts:
Commodities have typically offered a hedge against inflation, but Spanjaard believes hedges should be in hard assets. “Shares are not particularly expensive and investing in sound companies makes sense. Diversify with a range of companies and don’t buy cheap companies with high dividend yields because these can fall,” he advises. The price risk that has arisen from commodities and raw materials means managing price volatility, which is tricky at best. Which alternative hedges are you keen on? Comment below or email fiona@fanews.co.za.

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