"Commodities Prices Plunge Amid Slowdown" is the ominous headline at the top of page 7 in today's Wall Street Journal, introducing an article filled with dire references to declining prices for oil, steel, cotton, coffee…; a glut of inventories and stockpiles at the same time that end user demand has plummeted; growing evidence of slowdown in China; new worries about the U.S. economy and the European debt crises… etc. etc. etc.
All of which leads to speculation about whether the decades-long commodity "super-cycle" is coming to an end.
To which we respectfully say: Nonsense!
We are probably only about half way through the current super-cycle. Moreover, the best gains are likely yet to come.
First, in any secular bull market there are inevitable corrections. That was the case with stocks, if you recall, during the bull market that began in the early 1980s and ran until 2000. Even the '87 stock market crash, as painful as it was at the time, soon became a distant memory. Ditto for commodities. Just four years ago, you'll remember, commodities declined by 40 percent only to rebound sharply on their way to new highs.
As far as the persistent fear of a "hard landing" in China introducing a long period of stagnating demand, it ignores the fact that China's resource consumption on a per capita basis remains only a tiny fraction of what we here in the West use. Moreover, that country is currently spending trillions of dollars to develop its economy, putting particular emphasis on alternative energies. This will by necessity entail absolutely massive quantities of raw materials - materials the world will have a tough time supplying.
And here we come to an even bigger problem with this kind of focusing on the short-term symptoms of the recent correction in commodities: its utter lack of recognition about what has changed so fundamentally - and so dramatically - about today's commodity markets compared with those of the past.
For unlike in the past, the world is now beginning to contend with resource scarcity. This is staring us right in the face, yet few are taking a cue from commodity price signals. Despite the sharp slowdown in Europe this year and China's growth slipping to around 8 percent, Brent crude oil, the world's primary benchmark, is trading above $96 dollars a barrel! Even a decade ago, troubles on the scale of what Europe is experiencing now would have driven oil down to the $40-$50 barrel range.
The same can be said for copper. Despite the economic slowdown, copper at $3.45 a pound is about three and a half times its average price during the 1990s. And likewise for other commodities as well.
What we're experiencing here, as we've argued many times before, is not the end of the commodity super-cycle, but the end of cheap resources. To make our perspective crystal clear: it's not that we are running out of oil or metals, per se, but it is finally starting to sink in that supplies of easily accessible resources are finite. And moreover, that scarcity is leading to resource nationalism, which is compounding the problem.
Another thing we've pointed out in the past is that mining executives at major companies such as BHP Billiton (BHP) and Rio Tinto (RIO) are scaling back their exploration budgets, not because of a lack of demand (as the WSJ article implies) but due to uncertainties surrounding gaining access to ore bodies. This will mean even less commodities will be available for consumption in the future. And what do you think that will do to prices?
As Rio Tinto's Chief Executive Tom Albanese put it, "The next five years is going to be a supply story; the last five years has been a demand story. I am not sure the economic forecasters have cottoned on to that observation yet."
Sure enough, if you just flip the page in today's The Wall Street Journal where the "Commodity Prices Plunge Amid Slowdown" article appears, you'll find the continuation of a much longer front page story, with the headline "Grinding Energy Shortage Takes Toll on India's Growth."
If the commodity markets could literally speak, they might quote what Mark Twain once said after hearing that his obituary had been published in a New York newspaper:
"The reports of my death have been greatly exaggerated."