Commodities Super-Cycle And Metal Prices: China Still Dictates

As we mentioned in Part One, throughout the 20th century, stocks were flat when commodities were in their “up” cycle and made all their gains when commodities were quiet. The surge in material prices during the last decade coincides with what is a “lost decade” for stocks.

Some would argue that is mostly a result of the credit crisis, but Authers points out there is also an intuitive case for these arguments.

When commodity prices go up, costs go up and resources are rationed. This is only good for commodity producers. When raw material prices are flat, the capitalist machine is unencumbered with volatile raw material prices, so it can invest and operate efficiently.

The super-cycle has been so closely linked to China, that no discussion makes sense without reference to the engine of the current (or last?) cycle.

Over the last 20 years, prices of commoditieshave been linked almost perfectly to the creation of foreign exchange reserves. When there is more money around, people will bid up the prices of hard assets.

In the past two years, China, which built a huge stockpile of reserves on the back of receipts from its successful exports (and in the process also became the world’s most voracious consumer of many basic materials), has steadily allowed that accumulation to diminish. It wants to refocus on internal growth, and it may also want its currency to rise - which helps head off inflation.

If so, China is following the exact same course as other Asian economies – Japan, South Korea and smaller tigers have gone through the same double-digit growth for a decade or so, only to settle down in time to stable 5% growth rates. China is doing to same, only on a larger scale.

Of course, commodity prices, and certainly metal prices rarely remain high for prolonged periods of time. High prices stimulate both substitution and new mine investment, both of which have been in evidence during recent years.

But the extent to which a more stable Chinese growth rate and greater reliance on internal consumption mitigates China’s impact on global metal demand will have far-reaching effects for metal buyers in the future, some of whom have only ever known the volatility of the last decade.

Arguably the mining companies themselves are already positioning for just such a stable-priced world. Capital expenditure is being reviewed and quality is taking over from quantity.

What goes around comes around, they say, for metals as well as for every other commodity.

by Stuart Burns