Is the commodity super cycle finished or just getting started ?

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Is the commodity supercycle finished or just getting started?

The new Global world can be a confusing place at the best of times when trying to forecast where we are heading economically. I have enclosed expert opinions to make my point. A report by Credit Suisse has suggested the commodity supercycle is over. The report suggests the long-term strategy by China is to reduce investment spending while withdrawing monetary stimulation will, in turn, result in lower demand for resources.

This is based on the theory that China is coming towards the end of a huge wave of infrastructure investment while a private sector housing boom is slowing rapidly.

Economic growth in the next decade is projected at 7% – 8% compared with an average of 10.7% in the past decade. 

The nature of the economy is also changing, with a greater emphasis on internally-driven consumption against the previous export-driven focus.

Relative to the size of its GDP, China already is a mega-weight in commodity markets and demand per unit of GDP growth should inevitably tailor off from a high base, driven by a decade-long housing boom and infrastructure investment boom.

For example, China uses nearly as much aluminum per capita as the US and Japan, despite having a much lower GDP per capita ratio, the report says.

From 2000 to 2010, China’s imports (in value terms) of iron ore surged by 42.5 times, thermal coal 248 times and copper 16.2 times. During the same period, its production (in quantity terms) for aluminum jumped by 441.8%, cement 219.5%, and steel 396.0%.

It is the number one consumer in virtually all commodity categories in the world.

“In sum, the golden age of infrastructure investment is over. “Home ownership has already reached 67% in the urban sector well above the world average. However, housing prices are now outpacing average incomes since the average person in China needs to spend ten years of salary to pay for an average apartment, versus the world’s average of about six years.

What’s more, as China transitions to become a more consumption-led economy, export growth is likely to be muted in the years ahead as China’s competitiveness will be the appreciation of the renminbi. However, not everyone agrees.

A report by the Royal Bank of Scotland believes China’s needs are merely changing, not shrinking. China’s rising GDP per capita will fuel demand for electricity and telecommunications infrastructure investments. While a resource led and export-led infrastructure investment boom may be over, rising consumption in the country’s central and western regions will set the stage for energy infrastructure investment.

China’s infrastructure investment needs will amount to an eye-watering US$10.5 trillion between 2011 and 2030, accounting for 55% of global spending in this area.

This compares with $2.9 trillion that China invested between 1991 and 2030. To many, the Credit Suisse report is too narrow. India is still growing quickly and could pick up some of the global demand that China is giving up. Also, with commodities priced in US dollars and that country seemingly doing all it can to bring down the value of its currency, the price of resources should continue to rise.

Also, if we are in a ‘supercycle’ then history suggests it has a long way to go. Over many centuries, the average commodity cycle has been 13 – 18 years.

Supercycles last 20 – 25 years. Jim Rogers, the investment guru who picked the turnaround in the commodities cycle from its earliest days in 2000, is on record as saying this cycle could last another 30 – 35 years.

He is particularly enthusiastic about food, gold, and silver. Therefore, it is possible we are only a bit more than a third to a halfway through one of the biggest supercycles ever.

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