From the AFR:
The next commodities boom is “a generation away” for some key raw materials, and it is the commodity economies – such as Australia – that will provide the more compelling tactical opportunities to go short as the bubble deflates.
That’s the view of Atul Lele, chief investment officer at Deltec, the private bank and wealth manager, who takes a negative view toward iron ore and the industrial metals but remains favourable on agricultural commodities. Even taking a long-term view, “all commodities are expensive”.
Yep, exactly. My own view is that the commodity super cycle is entering a super bust from which it will take at least a generation to see any material recovery owing to three factors.
The first is demand and supply. On the former, China’s post-GFC growth was driven in some large part by capital mis-allocation, resulting in phenomenal oversupply in areas of real estate, very high risk growth in shadow banking, a collapse in productivity growth and now a push by authorities to rebalance the economic structure away from building towards innovation, consumption and services, to prevent a debt crisis. The days of China’s super-charged GDP growth are unexpectedly over. All of these trends are very obvious in its primary growth drivers:
For supply, miners assumed the demand was endless and so build out huge capacity which must deliver a return and thus will keep pumping product as prices fall. Eventually, when prices fall far enough, volumes will also begin to fall but this is a multi-year process.
The second factor is the definancialisation of commodities. Over the super cycle commodities enjoyed a monetary tailwind as the US dollar in which they are priced went through an historic devaluation. The embarkation upon the second phase of the post-GFC global economic recovery has shifted that currency into a secular bull market, simultaneously supported by superior US economic prospects and monetary easing everywhere else:
The US dollar will appreciate right thought the end of the cycle as the Fed eventually tightens policy and then crisis begins to unfold in emerging markets on dollar outflows. Commodities now face a significant and secular monetaryt headwind.
The third factor is related in that over the super cycle investors embraced commodities as new asset class that could protect them against currency devaluation. However, it has dawned on investors that commodities are not much of an asset class for the long term given no yield, and once the cycle turns the exit looks pretty good. As well, moving with admirable haste, US regulators have shoved banks out of the commodities trade owing to the balance sheet risk that commodity hoarding entailed. We can therefore expect investors to continue to de-hoard commodity stockpiles:
And so, commodities are headed into a super cycle bust. Unless you’re Bloxo.
