The fuel for commodity super cycles is usually twofold. Strong commodity demand and cheap money. There are some reasons to believe that these two fuels for the current cycle will be less available in 2012.
There have been three major super cycles in commodities. The 1930-40’s, the late 60’s and 70’s, and the post 1999 period. All these cycles have lasted about 15 -25 years, albeit this is a very small sample size. Nevertheless, if we have a turn in emerging market demand and slightly tighter money, there should be less momentum for overall commodity prices to move higher in the next two years.
The strong demand for this cycle has been the strength of emerging market economies. More specifically, China has been the driver for demand. China has accounted for 40% of the increase in global oil consumption and 123% of the increase in copper demand. However, the current Chinese 5-year plan calls for a 25% decrease in infrastructure development and a reduction in the economic growth rate to 7.5%. This is down from the double digit growth of the last decade. A decline in infrastructure developemtn will redcue the demand for steel and construction material. A lessening of demand will allow supply to catch-up and force prices lower. This is especially the case for commodities which require a long production lead time like metals.
The supply of money has been plentiful through the quantitative easing programs of many developed countries. Even with a slight recent slowdown, there is a lag between money growth and economic activity, so on the surface there should still be monetary policy fuel for commodities. However, there is less likelihood of further quantitative easing in the US. The Fed is signally that growth in the US has been strong enought to delay any immediate aciton. Consequently, real rates have bottomed and Treasury nominal yield have started to move higher. This places a macro drag on commodity prices.
Call it headwinds but there is less likelihood for this super cycle to continue.
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