How’s this for a stream of counter cyclical indicators? First, this week the Metals and Minerals Investment Conference announced that they would be cancelling the event indefinitely due to current challenging conditions in metal market. Meanwhile Credit Suisse announced that they would be pulling out of commodities trading, following a number of their peers including Deutsche Bank, JPMorgan and Barclays who also said they are either scaling back or exiting the commodities arena.
When the last bulls in town (be it investment conference organisers or investment banks) have folded it could mean that a major turning point is close. Banks from Citigroup to Deutsche Bank have called an end to the commodities super-cycle over the past couple years. The most recent being Goldman Sachs who warned in its report Emerging Market Forex and the End of the Commodity Market Super-Cycle that rising supply over the next five years would hit commodity prices (see table below).
In sharp contrast to the pessimistic outlook suggested by investment conference organisers and investment banks, industrial metal prices have surged in recent months. First, nickel prices are up almost 40% this year due to an export ban in Indonesia. Meanwhile zinc and aluminium prices have surged to three year and 17-month highs respectively as earlier low prices forced producers to cut output, reducing stock levels and fueling the latest rally. Efforts by producers to capitalise on recent higher prices has faltered as new projects are delayed and existing capacity fails to return to production quick enough. Finally signs that Chinese economic growth have stabilised have also supported investor confidence in industrial metals.
So has the commodity super cycle turned and we are now on the next upswing? Looking at recent trends the bull run in nickel prices may have run its course now as a new government in Indonesia appears to be signalling that it could row back on its ore export ban. Signs that Chinese physical demand for commodities may be stabilising may also prove illusory. The Baltic Dry Index (the cost of transporting commodities like iron ore) has fallen to 18-month lows and had its worst July since 1986. Although activity in the manufacturing sector has stabilised (hitting an 18-month high in July) activity in the construction sector (key to demand for industrial metals and in particular copper) remains weak and could deteriorate further over the next couple years.
Perhaps key to commodity prices over the next few years is what happens with oil prices. Energy being a key input into the production and transportation of commodities. Without the recent escalation in oil disruption (both real and perceived) oil prices would be significantly lower given the growth in US oil production. This trend of high oil prices is likely to continue, supporting commodity prices at higher levels than they would be otherwise.
Commodity super cycles are not like stock market crashes. There isn’t a rapid escalation in prices followed a crash before the upward trend resumes. Commodity super cycles have tended to be characterised by cycles lasting 10 years on the upswing followed by 20 years of declines as excess investment leads to a flood of supply. This downward slide is going to be bumpy.
Related article: The half time score for commodity prices in 2014
Related article: Chart: Where we are in the commodity super-cycle