By losing faith in the supercycle story, the markets (or investors) have called its end by shorting commodity assets and pushing prices lower. But can markets decide to end a supercycle?
In the last couple of decades of the 20th century, OECD countries, with their service-based and mature economies, led global growth, with the result that commodity prices consistently fell in real terms. But from 2000 until very recently, China's soaring demand for resources as it rapidly industrialised and urbanised led to shortages and unprecedented price rises, as supply could not keep up with the escalation in demand.
Now, supply is improving and demand declining, leading to price falls. While there is a long lead time in mining projects, mines initiated back in the boom times are starting to become operational. Demand growth in China is easing as the government tries to engineer a soft landing for the economy and a longer-term shift towards more consumer-led growth. And overall, global economic growth is struggling, weighed down by recession in the euro zone, also depressing demand.
The commodities supercycle, however, is far from over. China's economy is slowing, not contracting, and the EIU forecasts real GDP growth of a more sustainable 7-8% a year from 2013 to 2015--still robust growth by any measure. Consumer-led growth will continue to require raw materials as cars, consumer electronics and white household goods are all made from metals. Moreover, the EIU expects urbanisation–a huge consumer of industrial raw materials—to continue.
While China has led the recent price rises, other countries will likely take up the mantle in the not so distant future. Populous countries in Asia such as Indonesia, the Philippines, India and elsewhere in Latin America and the Middle East are all seeing household incomes rise to the sort of levels (estimated at around US$4,000 per capita) which allow for a rapid increase in expenditure on consumer durables, notably cars. Furthermore, urbanisation is ongoing across the emerging world. While individually none of these countries could have the impact of China's recent emergence, collectively they will enable solid growth in commodity demand over the next decade.
It is quite possible that markets will push prices lower in the near term. This in itself could lead to lower raw material supply – and will certainly lead to lower investment in future supply – so that in a couple of years' time, the commodities market could once again find itself unable to meet demand. However, in the medium term, following this period of adjustment, the solid commodity demand growth the EIU expects will put a floor under prices at levels much higher than those that prevailed in the 1990s.
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