Citigroup Sees ‘Death Bells’ for Commodities Supercycle in 2013

The commodities supercycle is probably ending this year as China’s economic growth slows and the nation focuses less on infrastructure and urbanization, Citigroup Inc. said.

This year will probably signal “death bells” for the supercycle, or a longer-than-average period of rising prices, Citigroup said in a report dated yesterday, reiterating similar calls made last month and in 2011. The Standard & Poor’s GSCI gauge of 24 raw materials is down 2.1 percent this year, after an almost fourfold advance since the end of 2001.

The rally in the past decade spurred new mines, wells and crop acreage. Economic growth in China, the biggest user of everything from copper to cotton to coal, slowed to 7.4 percent in the third quarter, from as much as 12 percent in 2010. Expansion will increase to 8.05 percent in the three months through September and remain at 8 percent until mid-2014, according to economist estimates compiled by Bloomberg.

Change is “ushering in a new decade of opportunities based on how individual commodities will perform against one another and against broader market indicators such as equities or currencies,” Citibank said in the report. “The downward shift in China’s economic growth rate combined with the decline in the commodity intensity of growth have a permanent and profound impact on global markets.”

The drop in the S&P’s gauge of commodities this year compares with a 12 percent increase in the MSCI All-Country World Index of equities, which advanced to the highest since June 2008 as U.S. stocks reached a record. A Bank of America Corp. index shows Treasuries lost 0.4 percent this year.

Commodity Prices

Natural gas and cotton are the best performers in the S&P index this year, with gold and silver, which both entered a bear market in April, dropping the most. Commodities are down about 29 percent since July 2008, when the worst recession since World War II curbed demand. While China’s growth accelerated in 2009 through the start of 2010, it’s since slowed.

“China has reached a new phase, less focused on infrastructure and urbanization, both of which are highly commodity intensive,” Citigroup said. “Lower single-digit economic growth shifting to a greater emphasis on consumption rather than investment hits industrial metals, bulk commodities and to a lesser degree energy demand.”

Hedge funds held a net-long position, or bet on higher prices, of 588,482 contracts across 18 raw materials in the week to May 14, U.S. Commodity Futures Trading Commission data show. That’s about 33 percent below the five-year average.

Raw materials have been in a supercycle since 2001 and the average length of each phase since the late 1700s has been almost 21 years, Chris Watling, chief executive officer of London-based Longview Economics Ltd., said in October at a conference in London.

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