The FT has an article debating whether the so called commodity super cycle has come to an end. Commodities have fallen hard since the summer and many seem to believe that the secular commodity bull market is over:
The severity of the crisis has surprised natural resources companies’ executives, commodity traders and Wall Street bankers alike. After all, the commodities boom of 2003-08 has been the most notable for a century in its magnitude, duration and the number of commodities whose prices it has lifted. The sudden plunge poses a fundamental question: is this just a temporary blip within an upward trend, with prices likely to rebound in the medium term, or is it the conclusion of another commodities cycle of boom and bust, with a period of relatively stable prices coming ahead?
The World Bank seems to believe the commodity boom is over:
With its report released on Tuesday, the World Bank has put itself among the most vocal in warning that the commodities boom has come to an end. Some executives in the natural resources industry agree – in private. Like earlier booms, this one has ended as a period of solid economic growth gives way to a recession in the US, Europe, Japan and a sharp slowdown in emerging countries including China.
While demand has certainly slowed over the last few months as world economic growth has fallen, that doesn’t mean the commodity super cycle is over. There are different kinds of bull markets in commodities. Some of them are driven by supply or demand shocks and others are driven by the value of the dollar. What we experienced over the last 5 years was a commodity bull market driven by the drop in the dollar. And while the dollar has risen during the financial crisis as a perceived safe haven, that is unlikely to continue indefinitely. In fact, the dollar rally may have already peaked:
When the government devalues the currency, people want to own real things such as commodities and real estate. We saw that in both of those assets throughout much of the first part of this decade and if the dollar resumes its fall, I expect commodities at least to rise again. Whether real estate rises is a tougher question, but if the dollar falls, it wouldn’t surpise me to see that happen.
I am in the camp with Jim Rogers who thinks the commodity bull market has a long way to go:
Dec. 5 (Bloomberg) — The fundamentals of commodities are “unimpaired” and prices will rebound when a lack of new supply leads to shortages, said Jim Rogers, chairman of Rogers Holdings.
“Commodities will be the place to be if and when we come out of” the downturn, Rogers said yesterday in an interview from Miami. “The only thing where fundamentals are unimpaired are commodities. Farmers cannot get loans for fertilizer now. Nobody can get a loan to open a zinc mine. So we are going to have some serious, serious supply problems before too much longer.”
The Reuters/Jefferies CRB Index of 19 commodities has plunged 53 percent from a record in July on concern that a global recession will sap demand for raw materials.
Rogers said crude oil and agricultural commodities were the most likely to have shortages and the outlook for zinc and cotton had “improved.”
Central banks and President-elect Barack Obama should be careful in responding to the global economic slump, Rogers said.
“It is astonishing how bad they’re reacting this time. It is unfathomable to me what they’re doing and you think some of them would have read some history,” he said.
The actions the Fed has taken to combat the financial crisis will ultimately prove inflationary and detrimental to the value of the dollar. I suspect the “stimulus” plan will also prove to be inflationary. If the spending takes a while to kick in (and it will if it is concentrated on infrastructure projects), it could start just about the time the economy is naturally recovering. The added demand from these government projects would increase the demand for commodities just when demand is rebounding anyway.
We have also seen the commodity companies responding to the drop in prices by removing capacity and laying off workers. Rio Tinto is cutting back (via Financial Post):
Global miner Rio Tinto, saddled with nearly $40 billion U. S. in net debt, said it would cut 13 per cent of its workforce, slash capital spending and sell more assets as it battles a collapse in commodity prices.
Freeport McMoran is also cutting back (via Forbes):
Falling commodity prices mean budget cuts for Freeport-McMoRan Copper & Gold.
The Phoenix-based mining company said Tuesday it was suspending its dividend, scaling back production and slashing its 2009 capital expenditures plans.
BHP is cutting production:
BHP Billiton Ltd is temporarily cutting manganese production at its 60 percent owned Samancor Ltd operation due to weak market conditions, the company said on Wednesday.
The cuts are expected to reduce ore production by 21 percent and alloy production by 23 percent for FY 2009, BHP said in a statement.
I don’t think the commodity super cycle is over. The dollar is likely to weaken again and commodity supply is being cut. When demand picks up again, and it will, prices will rise. Given a choice between believing Jim Rogers, one of the most successful investors of all time, or the bureaucrats at the World Bank, I think I’ll take Rogers.