Commodity Markets May Not See a Sustained Rally Until the 2020's

  • No new demand on horizon as China raw-material appetite slows
  • Price downswings seen as typically 50% longer than upswings

There’s no quick fix on the horizon for the world’s beleaguered commodity markets, if more than a century of price cycles is any guide.

As producers endure the longest slump in decades, miners, farmers and drillers who supplied almost $8 trillion of raw materials at their peak in 2011 may not see values bottom for as long as 24 months, said David Jacks, a professor of economics at Canada’s Simon Fraser University who studied more than 160 years of price data for everything from gold and cotton to oil and copper. It may be the 2020s before there is a sustained rally, he said.

“We’re about 75-80 percent of the way there in terms of the coming down from the absolute crest in prices,” Jacks said by telephone from Burnaby, British Columbia. “The trough is not going to be an abbreviated event. It’ll be years beyond that of flat-lining.”

The rout has deepened as the economy of China, the top consumer of grains, energy and metals, expands at the slowest pace in two decades. At the same time, supply in some markets is still expanding after record prices encouraged producers to raise output. Raw materials may be in the fourth year of a 20-year “bear super-cycle,” according to the Ned Davis Research Group, which has studied commodities busts dating to the 18th century.

Longer Busts

Jacks isn’t alone in his outlook. Fund managers, researchers and banks, including Goldman Sachs Group Inc. and Morgan Stanley, have forecast a long wait ahead for investors. The Bloomberg Commodity Index, a measure of returns from 22 components, is down about 15 percent in 2015 after touching a 16-year low in August. The gauge is heading for the fifth straight annual loss, the longest slide on records dating to 1991.

“We’ll be grinding along the bottom for a lot longer,” said Viral Patel, Sydney-based head of Australian research at T. Rowe Price Inc., which manages more than $770 billion of client assets globally. It will take at least three years before the first commodities begin to rebound, with nickel and copper most likely to benefit from China’s transition to consumer-led growth, he said. Copper wire is used in cars and appliances, including washing machines and refrigerators.

Between 1865 and 2010, the world experienced four so-called commodity super-cycles, according to a 2012 analysis for the United Nations Department of Economic and Social Affairs by economists Bilge Erten, now of Northeastern University in Boston, and Jose Antonio Ocampo of Columbia University.

Before the current cycle, the previous peak was in 1973 and followed by a 26-year decline in commodity prices excluding oil, according to their findings. Since the turn of the 20th Century, downswings in prices have typically been about 50 percent longer than upswings, according to Simon Fraser’s Jacks, who analyzed the historical price changes of 30 items.

Raw materials started to become an investor magnet at the start of the most-recent boom cycle around 1999, as China’s economy was expanding to become the world’s second-largest by 2009. The Bloomberg Commodity Index more than doubled in the six years through 2007, before the global recession.

The current cycle has been unusual because of the rapid speed of China’s urbanization, according to Jacks. Before then, industrial booms in Britain and the U.S. each spanned about 50 to 100 years, as well as the re-construction of Western Europe and Japan after World War II. There’s no major new source of raw-material demand growth like China on the horizon, said Jacks, who published a March 2013 paper on booms and busts since 1850.

Metals to energy have tracked China's rapid expansion
Metals to energy have tracked China's rapid expansion


“The scale of the Chinese transformation that we’ve lived through, that is historically unprecedented,” Jacks said. “They’ve moved over 300 million people into cities in the past 20 years. That’s something that we’ve never seen in human history.”

Producers caught unprepared for China’s dramatic demand boom are now also uncertain about the pace of the country’s slowdown, according to Jim Gowans, an adviser to Barrick Gold Corp. who has spent about 40 years in the mining industry. “You used to be able to predict that it was going to be about a four- or five-year cycle,” Gowans told reporters Oct. 1 in Melbourne, citing decades of observing markets for metals including copper, nickel and gold. “You are going to see much more volatility now.”

No Next China

Goldman Sachs forecasts that copper will remain in surplus through at least 2019 and says crude-oil prices may remain low for the next 15 years. A more prolonged period of reduced revenue will be required to force producers to cut supply enough to balance the metals and coal markets and spark a revival, according to Macquarie Group Ltd. While Pacific Investment Management Co. says it doesn’t expect a major rebound, it sees declines in commodity prices as now largely over.

Without a new mass industrialization somewhere to drive demand, producers will have to rely on a slower path to the next boom, potentially spanning decades, according to Jacks. Prices won’t really take off until global growth overwhelms existing production capacity, he said.

“We need that next demand catalyst to come along and surprise every one, just like China did in the early 2000s, and there’s just no country on my radar at this point which is going to satisfy that kind of criteria,” Jacks said. “Some of the companies are operating under the horizon of 40- to 50- to 60-year investments, and that’s kind of the perspective that you need to take in the mining industry.”

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