The Not-So Super-Cycle
By Julian Jessop
THE SHARP FALLS in commodity prices during May – indeed the declines over much of the past year – have highlighted several points that are central to understanding the market outlook. First, the recovery from the global economic and
financial crisis has been weak and fitful º and will remain so. Growth will be particularly vulnerable to all sorts of shocks, whether it is the break-up of the euro, a hard landing in China, a double-dip in the US, or some new crisis yet to reveal itself. Second, even if some commodities are still in the
early stages of a multi-year ‘super-cycle’ of rising prices driven by buoyant demand from emerging markets (an assumption that we at least have long questioned), prices can easily be blown off-course for long periods by macroeconomic and financial factors. Third, the diversification benefits of
commodities are much exaggerated – with gold perhaps still the main exception. Fading investor enthusiasm for commodities as an asset class is therefore another threat to prices. Looking back, 2011 was a year of two
parts for commodity markets, with broad- based strength in the first four months giving way to general weakness since May 2011. The turning point coincided (purely by chance!) with the launch of our own Commodities Service, which from the outset has emphasised the downside risks from a deterioration in the global economy and the fall-out from the crisis in the eurozone. Over 2011 as a whole, the only major commodities to show significant increases were crude oil (Brent was up 13% in dollar terms) and gold (up 11%), and even these two prices were well below their peaks earlier in the year. The high weight of oil in the most closely watched S&P GSCI commodity index means that this benchmark was broadly unchanged. But most components of the GSCI saw large falls, including copper and wheat (both down around 20%), zinc (around 25%), and cotton (35%). 2012 has been no better. Soybean prices are one of the few exceptions, rebounding
by around 15% in the year-to-date. But this May’s widespread falls have left many key commodity prices some 10-20% lower than they started the year. Oil prices have also slumped, with Brent back below $100/bbl, despite lingering tensions with Iran. Once again, concerns about global demand have more than offset the supposed tightness of supply. The problems in Europe are also continuing to undermine coal prices.
This is a roller-coaster, not a super-cycle
Given this, it is all the more remarkable that
the existence and power of the super-cycle is still so widely taken for granted, despite doubts now creeping into the mainstream. Certainly, commodity prices are much higher now than they were in the early 2000s. But so are the prices of many other assets, which itself suggests that financial factors may have been just as important a driver as
June 2012
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