The commodities cycle that sent prices rising almost fourfold over 10 years is reversing and will eventually drive raw materials into a structural bear market, Goldman Sachs Group Inc. said.
Growth in shale oil output will keep U.S. energy prices low, reinforcing economic growth and leading to more tapering of government stimulus, the bank said in a report dated yesterday. That will cut raw-material demand in emerging markets and lead to weakened currencies that will encourage more production. The new cycle is the opposite of the “super cycle” that ran from 2002 through 2011, Goldman said.
“I can’t tell you about one commodity out there that has a bullish supply-side story,” Jeffrey Currie, head of commodities research at Goldman, said at the company’s investor conference in London today. “A decade of higher commodity prices generated a supply response.”
Commodities posted the first annual drop in five years in 2013 as supply exceeded demand for corn to sugar to nickel and investors lost faith in precious metals as a store of value amid signs that economies are improving. As higher prices spurred miners and farmers to boost production at time when China’s economic growth slowed, Citigroup Inc. said the “super cycle” of gains has ended.
“The rotation away from emerging markets and towards developed market demand as well as the supply increase, particularly the U.S. shale revolution, are creating a new commodity cycle,” Currie said in the report. “On net, this new commodity cycle eventually suggests a structural bear market in commodities, but we believe that is still in the distant future.”
The new cycle will lead emerging market nations to increase production to raise cash to make up for weakening currencies, which will further weaken prices and reinforce the U.S. recovery, Goldman said. A “structural” bear market is only in the future because of transportation, processing and distribution bottlenecks, Goldman said. Surging U.S. oil output is largely trapped in the country and copper smelters are failing to process rising supplies from mines, according to the report.
Commodity cycles last about 25 to 30 years, with the first half spent on building production capacity to meet demand and the next 10 to 15 years spent on building capacity to consume, Currie said. Returns in the last 10 to 15 years will be positive for industries such as petrochemicals, he said.
The Standard & Poor’s Enhanced Commodity Index will fall 3 percent in the next 12 months, with precious metals dropping 15 percent on top of last year’s 30 percent decline and agriculture falling 11 percent after sliding 18 percent in 2013, Goldman said. Industrial metals are forecast to decrease 5 percent and livestock 3 percent, according to the report. Energy will lose 1 percent, after gaining 5.6 percent in 2013, the bank said.
Gold prices will fall to $1,050 an ounce in 12 months from $1,246 an ounce now, while copper will be at $6,200 a metric ton from $7,283 a ton now as the market moves into surplus, the bank said. A record soybean crop in South America will send prices to $9.50 a bushel from $12.7325 a bushel now.
While Brent will be at $100 a barrel in 12 months and West Texas Intermediate oil at $90 a barrel, price risk is “skewed to the downside,” Currie said in the report. Uncertainty about oil supplies due to geopolitical risks in Libya and South Sudan means the bank is neutral commodities over the next three months, with prices forecast to return 3 percent in the period.
In three months, WTI oil will be at $99 a barrel, copper will be at $6,600 a ton and zinc will be at $1,900 a ton, Goldman said.