The Commodities Boom Is Dead. Long Live the Commodities Boom.

David Fickling is a Bloomberg Gadfly columnist covering commodities, as well as industrial and consumer companies. He has been a reporter for Bloomberg News, Dow Jones, the Wall Street Journal, the Financial Times and the Guardian.
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What's going on with BHP Billiton? The world's biggest miner bid for a share in a Chilean copper mine this year and is exploring for offshore petroleum in Australia and the Gulf of Mexico. Isn't the commodities super-cycle meant to be over?

One way of thinking about it is to take a trip to your local supermarket. Its owners probably purchased a lot of steel, concrete and bricks while it was being built. Now the doors are open, they're buying stuff that shoppers use every day: Food to fill their bellies, gasoline to fuel their cars, aluminum foil to wrap their lunch, electronic goods wired with copper, and stainless steel cutlery alloyed with nickel. Similarly, the U.S. used up a lot of gravel, cement, and asphalt to build the Interstate Highway system. Once that was completed, the main beneficiaries were the oil companies powering the cars using it. 


Sorting commodities into capital products that we use once, and operational ones we use again and again, helps make sense of what BHP Chief Executive Officer Andrew Mackenzie is up to.

Steel had a remarkable ride in recent years as China built 36 million new homes and a 19,000-kilometer high-speed rail network. Its main raw materials -- iron ore and coal -- took up more than half of BHP's capital spending budget in 2010. That era is past: China's production of rebar for reinforcing concrete peaked in June 2014, and the floor space of buildings under construction slowed to its most sluggish pace since at least 2005 in August. But while building work soars with a strong economy and plunges when it weakens, oil demand has remained relatively consistent for a decade:

Goldman Sachs reckons Chinese demand for capital commodities has already peaked, but it sees a brighter future for operational goods as rising incomes stoke demand for electronics and cars and the copper, aluminum and petroleum used to make and fuel them. Mackenzie seems to be thinking along the same lines. After years of relative neglect, base metals (mostly copper) took up a bigger share of BHP's capex than iron ore and coal put together last year. Petroleum had a bigger slice of the budget than iron ore did at its 2010 peak.

Miners and energy companies have to spend money on one commodity or another if they don't want their existing reserves to run out, so the shift in BHP's spending shouldn't be taken as evidence that copper and petroleum are out of the woods just yet. But if you want a guide through the current commodities rout, you'd do well to avoid the hard industrial stuff that boomed in recent years. Stick to what you can find in your house.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

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