“The mega-run for commodities has run its course”, according to Morgan Stanley’s chief global economist Stephen Roach. (See: Three Reasons why Stephen Roach is bearishon commodities). With the benchmark CRB commodities index 18% down from its May peak, oil 22% below its August high, gold and silver about a quarter and nickel 12% below recent peaks, many other analysts agree. But it’s more likely that the raw materials bull of the past five years is simply taking a break.
Not only do commodities tend to move in long cycles, lasting 20 years or more, but investor sentiment hardly suggests a major top. Relatively few retail investors have begun exploring commodities, while pension funds are only just getting round to them, as Steve Sjuggerud notes in Daily Wealth. “This thing won’t be over until everyone is on board.” Meanwhile, the demand-supply outlook bodes well. Expanding supply significantly will be an uphill struggle given that investments in new capacity were neglected during the long bear market of the 1990s and it can take five to ten years to develop a new mine, while many experts expect oil production to peak in the next few years. The recent oil discovery in the Gulf of Mexico, for instance, should boost US reserves by 50% but will not pump any black gold until 2010, says Martin Hutchinson on Breakingviews.com.
This long lag between increased demand and supply response “typically causes commodity booms to last several years”.
On the demand side, meanwhile, the spread of capitalism all over the developing world has boosted growth, the proceeds of which are being ploughed back into infrastructure development programmes, as David Fuller points out on Fullermoney.com. Consumption is also growing rapidly. Now that 5.5 billion people in the developing world “have a chance of emulating the economic success of 1.5 billion people in the developed world”, demand for commodities will be “unprecedented”. And while the US is slowing, emerging economies, whose demand “increasingly dominates” raw materials markets, are still expanding rapidly, says Hutchinson. Indeed, China and India are expected to spearhead global growth of almost 5% next year, says Fuller. All in all, “obituaries for the commodities supercycle are premature”.