COMMODITIES NOW


Real Commodity Price Indices Since 1900


100 150 200 250 300 350 400


50 0


1900 1920 1940 1960 1980 Sources: EIA, American Metal Market, Metal Bulletin, US Department of Labor


GDP growth (a little over 4% a year) at the same time as Chinese steel demand grew at 17% per annum (7% higher than GDP growth). The message from Citi is clear: China cannot continue to grow as we have come to expect and no other country (or EM grouping) can come close to taking its place – result: super-cycle over. Of course, others take a more sanguine view of


current developments in China. In the short term, bearish sentiment (encouraged by April’s worst set of activity data since 2009) may be becoming somewhat overdone, say BarCap. “There is a tendency for market participants to get downbeat on China only to be surprised by its resilience. That inclination is being exacerbated at present by a widespread belief that China is coming to the end of its period of most rapid demand growth for commodities (and not one we entirely agree with),” according to Suki Cooper and the team at Barclays Commodities Research.


2000


Oil Steel Copper


... “and in dollar terms almost tripling versus a GDP doubling in the last decade,” according to Sean Corrigan of Diapason Commodities Management. “A slackening of the pace of imports and exports across the region [AsiaPac] is a warning that ... our [OECD] drivetrain is in need of a serious overhaul. Could it be that the juggernaut that is the Chinese economy cannot possibly be subject to the same tedious quibbles to which its failed Western capitalist competitors have succumbed,” he asks.


Fitful Recovery The recovery remains “fitful” and


will remain 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,” explains Julian Jessop, Chief Global Economist and Head of Commodities Research at Capital Economics, [giving more detail on page 9]. 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, prices can easily be blown off-course. Add to this the deterioration in recent year’s of the diversification benefits of commodity investments in the face of the rampant financialsation of the sector and ‘herd’ trading behaviour, and we are presented with an ever more toxic cocktail. Commodity market price weakness since May


China cannot continue to grow as we have come to


expect and no other country (or EM grouping) can come close to taking its place – result: super-cycle over


“It is perhaps a little premature to start calling the


end of the China commodity demand growth cycle just yet. China has been a big drag on commodities in the past few weeks but with inflation falling, the government has much more room for manoeuvre than it did this time last year. If the monthly data is bottoming and growth momentum soon to pick up as our China economists expect, that negative influence could quite quickly reverse,” she insists. Slower emerging market growth (presumably because they all selling less things) belies the statistics for world trade – up in volume terms by 75% compared to a GDP increase of less than 50%


6 June 2012


has carried over into June, led by declining energy prices. Reflecting flight to safety fears, the strength in precious metals has helped limit broad index losses but industrial metals remain one of the weakest sectors ( as they have been over the past 12 months). Short term bounces in prices are,


of course, likely on a regular basis as the euro merry-go-round continues,


but the confidence of old for the natural resource market looks more and more drained by the day. Many analysts were reportedly ‘shell-shocked’


by the sharp declines in oil and other commodity prices, but like a number of other canny market watchers, Capital Economics’ Jessop had already braced himself for the fall-out. “Correspondingly, our commodity price forecasts need only some small changes to reflect the recent turmoil. In particular, we have lowered our end-2012 forecast for Brent crude from $95 to $85 per barrel, which simply brings forward the additional weakness we had anticipated for 2013,” he confirms.


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