COMMODITY SUPER-CYCLE
fundamental shifts in demand. Since the mid-2000s, the general pattern in commodity markets has been a boom followed by a bust (in the wake of the collapse of Lehman Brothers), followed by another boom and then another bust (as we are seeing now). This is a roller-coaster, not a super-cycle. Of course, some might argue that
the super-cycle has only temporarily been interrupted by the financial crisis and the global downturn. But the prices of industrial metals had
Figure 1: Global Metal Intensity 1.2
Metal Consumption per unit of Global GDP (1980 = 1, LHS)
Investment Share of China's GDP (%, RHS)
1.0
prime candidate to leave first. Admittedly, a Greek exit on its own might not be a big deal.
Greece accounts for a trivial 0.3% of world GDP and the rest of the eurozone would arguably be in a stronger position if Greece were to leave. In fact, Greece should eventually be better off as well. What’s more, unlike the sudden collapse of Lehman in 2008, the exit of Greece from the euro would not come as a complete surprise to most. Many commentators, having previously argued that the exit of even a small country from the euro was inconceivable, are now saying that it would be inconsequential. Needless to say, we think this view is complacent. The issue of
0.8 1980 1985 Source: The World Bank
already levelled off before 2008. In any event, we expect the problems in the eurozone to escalate further and global growth to remain sluggish. With China slowing sharply, this will maintain the downward pressure on the prices of industrial commodities. The weakness of agricultural commodity prices is also revealing, as these markets are supposedly the least sensitive to this stage of the economic cycle and assumed to be among the most likely to benefit from new consumption patterns in fast growing developing countries. Let’s examine two of these
vulnerabilities in more detail. First, it looks increasingly likely that the Greek government will be forced not only to default on its remaining debt but also to leave the eurozone completely. Indeed, we concluded two years ago that the euro would probably break apart within five years and singled out Greece as the
10 June 2012 1990 1995
course is contagion. If Greece left, the focus would simply shift to other weak countries. Even if the core members were able to hold the rest together to begin with (perhaps by further steps towards fiscal union and enhanced ‘firewalls’), a strong rebound in the Greek economy a year or so down the line might make exit irresistible for the likes of Portugal and Ireland. If contagion spread to the larger economies, such as Spain and Italy, the game would be up. The markets are already waking up to the weakness of the Spanish financial sector. Greece may be small but the eurozone as a whole accounts for around 14% of world GDP and the European Union around 20%. A second major threat is a
50 40 30 2000 2005 2010
slowdown in China. Fading inflation fears should allow policy-makers in Beijing to provide enough of a
stimulus to keep GDP growth above 8% this year, but only at the cost of increasing the risks of a harder landing further down this line. Investment already represents an unprecedented 50% of China’s GDP, much greater even than in countries with only slightly higher per capita incomes, such as Brazil and Thailand. What’s more, it is this unsustainable investment boom that has explained China’s huge appetite for commodities since 2000, and the corresponding surge in the metal intensity of global economic activity (Figure 1) rather than the long-established trend of urbanisation. China’s relatively unfavourable demographics will increasingly weigh on growth too.
... the level of China’s demand for commodities should continue to increase, but at a much slower pace than the markets appear to expect
We have reflected this in our forecast that China’s GDP
will slow to around 7.5% next year, well below the consensus, with trend growth slowing to around 6% within ten years. The commodity-intensity of economic activity should decline too. To be clear, the level of China’s demand for commodities should continue to increase, but at a much slower pace than the markets appear to expect.
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