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Commodity Review: Is The Commodity Super Cycle Over With?

|Includes: BHP, Rio Tinto plc (RIO)

Last week, commodities fell to two year lows - meaning some analysts are again suggesting that the commodity super cycle that began in 1999 might be coming to an end. Just consider the following facts and opinions:

  • The commodity boom was fueled by two forces: Rapid growth in emerging markets like China and years of low prices that had made commodity producers wary about expanding their operations. However, the Wall Street Journal has just pointed out that things have changed thanks to new extraction methods (e.g. natural gas) and more production. In fact and since 1999, crude oil output has risen 16%, copper is up 28% and aluminum is up 94%.
  • Back in April, Citigroup noted production rises in response to higher prices and the fact that China's dominance in demand is beginning to recede. Specifically and while demand from China for raw materials still dominates the outlook for individual commodities, it's "no longer the monolithic force" that it once was in the past decade.
  • Nomura has also joined the commodity super cycle bears when it stated back in April that while China will not have a hard landing, it will begin to diversify away from construction-intensive to consumption-intensive activities with the transition impacting different sectors with different speed and severity. This means that mining related companies which have benefited the most from the commodities super cycle will disproportionately impacted by any shift towards a new trend.
  • However, Credit Suisse apparently cannot agree internally about whether the commodity super cycle is over or not with Dong Tao saying it is. Specifically, he says the golden age of infrastructure investment, of the housing boom, of the export boom and of policy stimulus is over with and that "Doing head massage simply does not use as much steel as building an airport." However and while the Dong Tao-led Economics team and the Basic Material team at Credit Suisse claims that the commodity super cycle is over with, the Global Commodity team is much more optimistic.
  • FoxBusiness has just pointed out that the UK's five largest mining companies, Rio Tinto PLC (NYSE:RIO), BHP Billiton (NYSE:BHP), Anglo American PLC (NASDAQ:AAL), Xstrata PLC (XTA) and Glencore International (GLEN), have announced capital expenditure plans totaling $200 billion over the next five years but BHP and Rio are taking a softer tone on their long term capex plans. One analyst was also quoted as saying that the commodity price drop and rising inflation costs are a powerful signal to mining companies to either defer or halt capital expenditure plans and instead pursue mergers and acquisitions.
  • Last year, an extensive Mineweb article concluded that evidence was mounting that markets will get back to "normal," the European debt crisis will be resolved and growth from China, India and Africa and other developing nations will continue (with or without the west). The article also noted overwhelming evidence that included finite raw materials, unstable weather patterns, chronic supply constraints, increasing population base, growing global middle class, low real interest rates, shifting global trade patterns, continued monetization of European and US debt, persistent Dollar and Euro feebleness as political leaders attempt to devalue their way to prosperity, the need for asset diversification and speculation.

In other words, the jury may still be out about whether the commodity supper cycle is ending or merely slowing or set to continue. This means that if you are investing in or trading commodities, be sure to keep an eye on our stock forecasts for the individual commodity stocks you may own as there will no doubt e continued volatility until there is a clear answer about whether or not the commodity super cycle is done with or set to continue.