Maybe the Commodities Supercycle Is Actually Real
Economic supercycle theories, based on the long-ago musings of Nikolai Kondratiev and Joseph Schumpeter, have always been a little akin to voodoo: It's hard to believe that there is an underlying pattern to how economic indicators change over the course of decades. The current rout in commodity prices, however, fits in eerily well with the idea.
Almost all commodity markets have taken a severe beating lately. The aggregate Bloomberg Commodities Index is down 61 percent from its 2008 peak and 46 percent from the 2011 post-crisis high:
The rout can partly be attributed to expectations of a U.S. interest rate hike and the recent Chinese stock market crash, which made investors question the health of the world's second-biggest economy. It could, however, be the beginning of the downward part of the current supercycle.
Two economists -- Bilge Erten of the United Nations Department of Economic and Social Affairs and Jose Antonio Ocampo of Columbia University -- set out to describe the commodity supercycle in a 2012 paper, using the band-pass filter, a statistical technique that wasn't available to the 20th-century economists who pioneered the concept. They found four cycles between 1894 and 2010. The first one peaked in 1917 and ended in 1932, at the bottom of the Great Depression. The second one ran until the 1971 oil shock, peaking in 1951. The third one peaked soon after it started, in 1973, and ran until 1999. The current cycle, according to Erten and Ocampo, peaked in 2010 -- though if they had data from the next several years, they might have placed the peak in 2011 or 2012.
During these cycles, the real prices of all commodities excluding oil moved together. Their average prices also appeared to be in a long-term decline, probably related to technological advances. They peaked within each cycle, in correlation with global economic growth, but then then sank lower than when the cycle started.
So what could be driving the current downward trend? One candidate is China, where demand for metals such as aluminum, copper and steel grew sharply in recent years as the country urbanized and built infrastructure:
All the demand prompted the construction of new production facilities and exploration of new deposits, creating the conditions for a glut. Now, with Chinese development slowing, the metals price cycle may have peaked.
There's reason to believe that oil, too, could be falling in sync with the supercycle. The U.S. shale boom, huge investments in production expansion, the rise of sustainable energy in Europe and improved energy efficiency in developed economies all point toward lower prices. Cars using alternative energy -- electricity and hydrogen cells -- are fast improving, and Chinese demand for energy is about to stop growing as the country slows down and starts thinking in earnest about its depleted environment. Several of these factors would fall under Schumpeter's definition of "creative destruction."
It's harder to explain the drop in agricultural commodities. A growing global population provides ample demand. There is no major technological disruption, either. In 2011, the UN Department of Economic and Social Affairs predicted that the real prices of cereals and meats would increase by 20 to 30 percent over the following decade. If the downward trend continues, cheaper oil -- which lowers production costs -- will be the only reasonable explanation.
The current cycle is unusual in that the financial sector's involvement in commodities trading has sharply increased. This could skew prices in ways that would make it difficult to perceive the peak. It could also increase the correlation between different commodity classes, as speculators buy and sell in sync on news of interest-rate and currency movements. As a result, if there is such a thing as a supercycle, this could be the one in which all commodities finally fall into the same pattern.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
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