Whatever happens in the next few months, the trend in industrial raw materials over the next few years is likely to be up. Commodity prices tend to move in big cycles. Bull trends last about 20 years, says Chris Watling of Longview Economics. Following a bear market that lasted from the early 1980s until the turn of the century, prices began to rise. That trend was interrupted, rather than negated, by the global recession (see the metals chart below; indices tracking commodities in general show a similar pattern). “Right now we’re probably somewhere close to halfway through,” says the IMF’s Shaun Roche.
A step-change in demand is a key ingredient for a long-term raw materials boom. Enter the industrialisation of emerging economies, especially China. There are 3.5 billion people in Asia who now want to live like we do.
China’s copper consumption, for instance, is four times higher than in 1995. And there’s still a long way to go, says Adrian Day of Adrian Day Asset Management. For instance, most industrial economies consume 15 barrels of oil per person a year. China, on the other hand, consumes just 1.7 barrels.
Meanwhile, exploration and production are being cut back in a long bear market. And because it takes an average of nine years to get a mine up and running, once materials have been discovered, says the IMF, output struggles to keep up with the structural increase in demand. It doesn’t help that miners delayed projects during the latest downturn, or that “the best resources in the first world have been developed”, says BlackRock’s Evy Hambro. According to consultancy CRU, output in Chile, the top copper producer, has stalled. It seems the current “super cycle” has a few more years to run.