Is the beginning of May 2012 the end of the Commodity Super Cycle ?
I possed this question to Mr Ruchir Sharma at his presentation "Breakout Nation" LSE on 30 April 2012 and following his presentation I suggested that we pencil in this date as the beginning of the end of the Commodity Super Cycle.
Listen to the presentation
The Key reasons for an end to Commodity Super Cycle as discussed in the presentation plus my own thoughts and analysis
1. High commodity prices have resulted in many new mines being developed and have taken many years to come on-stream.
2. China's rapid growth has come to an end. Lower overall demand will feed into commodity producers constantly accepting lower prices, rather than has been the case in recent years of producers dictating prices.
3. The Euro-zone is now clearly back in Recession, with little prospect for rapid growth.
4. High commodity prices have depressed overall disposable income and feed into lower overall consumption. In the coming years overall demand for commodities will be well below the levels we have recently seen as the growth of the developing nations slows considerably.
5. The Commodity producing countries, have seen large capital inflows with their currencies now far too strong, resulting in loss of productive competitiveness. Australia Brazil case in point.
6. The Financialization of commodities is coming to an end. I suggest that we are now entering a phase similar to 2008, although this time the general public will not stomach the bailouts of Financial Firms and we will soon witness a financial crisis much worse than 2008. In 2008 several big named financial firms were able to use "Bailout Money" to stock-up on Commodities, but this time that luxury will not be possible as their own financial survival depends on liquidating everything.
7. Consumers in the Developed world have altered their behaviour and now are very concerned about purchasing fuel efficient vehicles, using public transport as an alternative, walking and cycling. This can clearly be evidenced with Western European oil demand now below consumption recorded in 1994.
8. Renewable Energy, while still in its infancy provides a glimmer of hope that the renewable energy industry will be a growth area, leading economies out of the Current Depression including Greece, resulting in lower overall demand for traditional coal and oil.
9. Recycling and reclaiming materials is growing as more efficient methods of processing recycled materials are developed, reducing the need for the extraction of raw commodities. Consumers are also playing their part with a Boom in mend and repair.
10. High Food Prices have been forcing city dwellers to either Grow Their or Own, local community food growing or has recently been cited in Greece returning to farming as a way of earning a living. Improved climatic factors will also improve crop yields in the coming years.
As of writing today 4 May 2012 WTI Crude had a 5% fall before settling below the $100 and I suggest that in the coming weeks with no stable government in Greece, just like we saw in 2008, there will be rapid unwinding of Commodity Contracts and it will be a race to the bottom.
Time will only tell if the analysis is Spot On.
You be Judge and Jury.
All I can offer is that the quicker the Commodity Bubble Unwinds, the quicker the world's economic engine will spring to life.
I will leave with one final thought
The Book "Breakout Nation" by Mr Sharma offered a set of principles in identifying countries with potential to be new growth Nations. I suggest Greece could be that New Economic Miracle and could easily take-over from China in being a production powerhouse for Europe, once Greece exits the Euro.