A debate is raging as to whether the commodity supercycle that began in the new millennium coinciding with the pulsating demand growth for all minerals from coal to iron ore to bauxite in emerging economies, particularly China, has run its course. In a recent article in the Financial Times, Morgan Stanley’s Ruchir Sharma says he finds in a 200-year history of commodity prices behaviour, a predictable path of “one decade up, two decades down. We have just finished one decade up. The path of oil... is an exception, but real prices have stayed broadly flat, with no evidence of supercycles.”
The FT article shows Sharma’s distaste for the commodity bubble for strong economic reasons, not to mention the commodity chase finds wealth falling in unproductive hands. According to him, the dotcom boom, which went bust earlier, left a rewarding legacy of a wired world. Sharma has, therefore, a soft corner for the “truly creative people” heralding that boom.
Sharma is heard with respect when he gives an opinion on something concerning emerging economies. At the same time, the commodity supercycle standing for a very long-term surge in prices may or may not have run out of all its steam. Unarguably, bulk commodities and metals subject to stagnation in the two decades preceding 2000, subsequently started experiencing regular spikes in prices on the back of unprecedented demand growth in emerging markets.
If China stood out for its ravenous appetite for raw materials, a big market opened up for their suppliers, benefiting emerging economies, like Brazil and Russia. In the beginning of the cycle, demand for raw materials was ahead of supply and buyers in China and India (for coking coal) were constrained to pay ever rising premium prices. Raw material price spikes left huge surpluses with the mining groups leading them to invest heavily in capacity expansion to take care of the world hunger for minerals. This is bringing about a balance in demand and supply and as a result, a southward push to prices of raw materials and collaterally to metals.
Unlike Sharma, many others argue that rises and falls in commodity prices happen in waves lasting 20 years. If it is to be accepted that a supercycle has a life of 20 years, then there is no running away from the fact that halfway, the market is taking a hard look at slowdown in all emerging economies from where the bulls in the first place drew inspiration. The Chinese double digit growth rate is in the past and as the world’s second largest economy is aiming at a soft landing, it grew at 7.6 per cent in the second quarter of this year. China has now lowered its 2012 growth target to 7.5 per cent from the earlier eight per cent.
As for India, Moody’s says the combination of a sharp and broad-based slowdown, a poor monsoon and a government that has “badly lost its way” will restrict the country’s growth at 5.5 per cent this year and six per cent in 2013. Growth deceleration in the two BRIC (Brazil, Russia, India and China) nations will set off a chain reaction. Fall in China’s raw materials import growth rates in particular will be hurtful for resource-rich and export-dependent Brazil and Russia. Australia, a major supplier of a host of minerals to the world, is taking a hit because of a downturn in commodity prices. Retreat by bulls is also due to discouraging industrial output data from Euro zone countries. Their main concern is Europe’s manufacturing hub Germany, which after sustaining growth through the European debt crisis is now feeling the impact of the Euro zone storm. No wonder the German manufacturing PMI in July was at its lowest for more than three years. Bulls are further disheartened by the Bank of England warning the UK economy would grind to a complete standstill and the US Federal Reserve and European Central Bank refusing to introduce new stimulus packages.
So, from China’s procurement of industrial raw materials being less rapid than in the past to so many other negative considerations, many have come to believe the boom is over and further price falls are on the cards.
The Economist, however, finds this prognosis premature. It quotes HSBC as saying the seven-year-old (not a decade-old) cycle is showing signs of “creaking middle age” and “a long senescence” is likely to follow. At the same time, mining majors like BHP Billiton and Rio Tinto are pinning their faith in demand revival in China. Flush with cash, a result of a long period of high raw materials prices, they are to spend over $200 billion in expanding capacity out to 2015. Rio hopes to see signs of improvements in Chinese economic activity as Beijing’s new stimulus measures “begin to flow through to infrastructure investment.” This millennium’s supercycle took off on China’s urbanisation drive, which saw 200 million people migrating to cities from villages.
A pause is there now. BHP is hoping that in the next phase of urbanisation in China, to run up to 2015, another at least 250 million will be swapping villages for cities. China is, therefore, expected to provide sustenance to the commodity supercycle for some more years.