Is the party over?
Credit Suisse Research believes it is. In a recent report, the investment bank argued that global commodity demand already has peaked. And the bank attributed much of the effect to a single factor: collapsing demand from China.
Fueled by a combination of investment booms in housing and infrastructure, China's demand for commodities surged over the past decade. From 2000 to 2010, the dollar value of China's imports surged by 42.5 times for iron ore, by 248 times for thermal coal and by 16.2 times for copper. During the same period, China's production (in quantity terms) jumped by 441.8% for aluminum, by 219.5% for cement and by 396.0% for steel. Today, China is the biggest consumer in virtually all commodity categories in the world.
By building dozens of empty cities, scores of underutilized airports and thousands of bridges to nowhere, China's demand for the commodities has been unusually high. China's level of domestic investment as a percentage of gross domestic product (GDP) has been unprecedented in economic history. Indeed, China's level of investment is close to 50% of its GDP. That spending is no more sustainable than the same strategy was for the Soviet Union in the 1930s or for Brazil in the 1960s. In the vocabulary of developmental economists, this kind of "extensive" growth simply cannot go on forever.
Equally importantly, the kind of growth ("intensive") China will experience is set to change. Authorities are working to rebalance China's economy away from commodity-intensive infrastructure investment and exports in the coming years, toward increasing domestic demand. Whether this fails or succeeds, a rebalancing toward household consumption means China's demand for commodities is set to plunge. As Credit Suisse aptly put it: "Getting a massage simply does not use as much steel as building an airport."
The supply side of the equation for commodities is changing, as well. Recent offshore oil discoveries in Brazil; fracking technologies in North America that hold the key to U.S. energy independence; and climate change making the Arctic Circle accessible to oil and natural gas production -- all mean that the prospects for production of commodities has improved in ways no one could have anticipated even 10 years ago.
No wonder Credit Suisse concluded that we already have reached the end of the current Commodities Supercycle. And that's bad news for commodity prices. London's Capital Market's research has already forecast that the copper price will fall to $5,000 per ton over the next two years, well below current levels of around $8,400 and less than half the highs seen in early 2011.
As Jim Rogers himself likes to say: "No one can revoke the law of supply and demand."
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