By Lisa Reisman
Never one to miss an issue of the Economist, any metal buyer will find the historical analysis of prior commodity price booms and busts a worthwhile read.
The Economist covered a new commodity study that contained several findings - among them this one – that the height of the most recent Chinese super-cycle may have already occurred.
Wait a second – didn’t we know that already?
Intuitively, perhaps yes, anecdotally for sure but perhaps now quantitatively. And though MetalMiner editor Stuart Burns called the metals bull run all but over, a recently published paper entitled, “From Boom to Bust: A Typology of Real Commodity Prices in the Long Run” offers up several findings perhaps more nuanced than previous discussions of commodity super cycles.
The first major finding of the study relates to one simple idea – the degree of volatility changes based upon the length of time examined. We might consider say a particular metal to look volatile based on a five-year chart but if we added another 75 or 100 years, it may appear different. The study goes on to say that the weights of the commodities in any index also play a role.
We actually have discovered this in our own MMI series whereby some of our indexes appear more volatile than others, undoubtedly due to the weights of the various commodities (e.g. metals) in the index.
In addition, the paper suggests patterns in which some of the super cycles have run (and some may still run) for decades as well as deviate substantially from underlying commodity price trends. What metals and related raw materials did the study’s author identify as part of a super-cycle? The nine commodities include: nickel, lead, steel, tin, copper, iron ore, chromium, silver and gold. Many of these super-cycles began in the mid-nineties. The study looks at the evidence and comes to a similar conclusion as others’ “…the accumulated historical evidence on super cycles suggests that the current super cycles are likely at their peak and, thus, nearing the beginning of the end of above trend real commodity prices in the affected categories.”
However, the Economist’ analysis of the paper places a much greater emphasis on two final points regarding boom and bust cycles. The first involves the notion that “periods of freely floating nominal exchange rates have been associated with longer and larger real commodity price boom/bust episodes…” particularly over the past 40 years with more punctuated boom and bust cycles. And last, the boom and bust cycles play a greater role in commodity price volatility and economic growth (or lack thereof).