By Stuart Burns
As we mentioned in Part 1, throughout the 20th century stocks were flat when commodities were in their "up" cycle, and made all their gains when commodities were quiet. The surge in materials prices during the past decade coincides with a "lost decade" for stocks. Some would argue that is in large part due to the credit crisis, but Authers points out there is also an intuitive case for these arguments. When commodity prices go up, costs are going up and resources are being rationed. This is good for commodity producers, but nobody else.
When raw material prices are flat, the capitalist machine is unencumbered with volatile raw material prices and can invest and operate most efficiently. The super-cycle has been so closely linked to China that no discussion makes sense without reference to the engine of the current (or last?) cycle. Commodities prices in the past 20 years have been linked almost perfectly to the creation of foreign exchange reserves. When there is more money around, people will bid up the prices of hard assets. In the past two years, China, which built a huge stockpile of reserves on the back of receipts from its successful exports (and in the process also became the world's most voracious consumer of many basic materials), has steadily allowed that accumulation to diminish. It wants to refocus on internal growth, and it may also want its currency to rise (which helps head off inflation).
If so, it is following the exact same course as other Asian economies -- Japan, South Korea, and smaller tigers have gone through the same double-digit growth for a decade or so, only to settle down in time to more stable 5% growth rates. China is doing to same, only on a larger scale. Of course, commodity prices, certainly metal prices, rarely remain high for prolonged periods of time. High prices stimulate both substitution and new mine investment, both of which have been in evidence during the recent years. But the extent to which a more stable Chinese growth rate and greater reliance on internal consumption mitigates China's impact on global metal demand will have far-reaching effects for metal buyers in the future, some of whom have only ever known the volatility of the last decade.
Arguably, the mining companies themselves are already positioning for just such a stable-priced world. Capital expenditure is being reviewed and quality is taking over from quantity. What goes around comes around, they say, for metals as for every other commodity.