Commodities: volatility or the end of a supercycle?

Several months after organizing an international conference on how to better understand cycles in raw materials prices, the IMF still predicts that from 2013 to 2018, both years included, there will be an average reduction of nominal prices of 13.7%. But the truth is that only in the first six months of this year prices have dropped more than twice, exactly a 30%.

This strong six-month decline is just the same as the one that took place during all the year 2009, when the recession of all industrialized countries affected even to emerging economies, to the point of reducing world trade more than 10%. Despite that first isolated 30% drop in 2009, from 2006 until the end of 2012 raw materials accumulated a 47% rise. But now this new 30% drop in January-June of the current year means already a loss of two-thirds of the accumulated increase since 2006 until now.

And if at the end of 2018 the IMF projections are still fulfilled, then their nominal price would mean stagnation in the prices of the commodities in real terms for developing countries (where annual inflation is on average close to 2% and they contributed more than half a point), but at the same time a considerable reduction for emerging and undeveloped countries (where average inflation goes from 5% to 10%; commodities alone meaning almost half of it).

Reasonable doubt is if the greater global rise cycle recorded in the last two centuries is over. Commodities prices, much more volatile that their physical quantities, went up during the first decade of the 21st century as never before in history since there are statistics, almost 200% (Figure 2, central picture). This is equivalent to five times more than in the late 1970s and early 1980s with the second oil crisis. Such an accused cycle (a supercycle, as some have called it) has surpassed even the drop that followed the First World War, which doubled to that recorded at the end of the 1920s and the beginning of the so-called Great Depression of the early 1930s.

Without making projections into the future, so far data are showing that this is the end of that supercycle indeed. Nominal average prices have increased the same as the world economy, top. This means that they remain below the sum of the population increase and level average income.

Even below resources in physical volumes (food, minerals, or its energy equivalents). They thus violate the catastrophic paradox or prophecy of Malthus, in the sense that the population tends to grow exponentially while resources only follow arithmetic and not exponential guidelines, at least so far.

Also, if we believe downward projections for the next six years, the answer – now unequivocal — is that we are already witnessing the end of the supercycle. Apart from the price volatility reflected in table 3 (the 30% drops in the recession of 2009 is preceded by strong increases then reproduced in 2010 and 2011), now all the public and private organizations that perform forecasts as well as all market fundamentals indicate that the reduction of prices will continue, although it won’t be as pronounced as in the first half of 2013.

By 2014 the latest IMF forecast foresees that energy prices will fall 3% because of increased oil production in non-OPEC countries (in particular North America); food prices will go down because the supply constraints will loosen up, and metals would stay near current levels. Although limited inventories and strong demand from China are generating certain risks on the short term, we should not discard an abrupt reversal of these prices in the medium term, especially if global growth is slowing down more acutely.

More change: less speculation

The biggest change is that there is less speculative money, since in financial markets there are more makers who bet on the end of three decades of bonds and commodities and turn towards stocks actions, as well as towards a liquidity punished by negative yields and threatened by financial repression. The appreciation of the dollar and weak inflation expectations encouraged some raw materials to be in the stock market in May and June, according to Black Rock, although their pace slowed down compared to April’s record and commodities funds almost suffered half-yearly losses.

However, for the second half of 2013 we should expect that an improvement in the market fundamentals may counterbalance concerns about global growth and the withdrawal of monetary stimulus in the United States, Japan and even Europe.

If some raw materials do not tend to grow much as the GDP is because the ratio of intensity between them goes down along with efficiency and technological and human development. These processes will promote the emergence of new sources of energy, as the non-fossils (renewable and nuclear as well as hydraulic), shale gas or other types of coal and oil, as the tight oil, tar sands, or the already well known biofuels; i.e., non-conventional oil, which is expected in the next two decades meet more than two-thirds of all the supply growth.

The U.S. want to meet much of that supply and be self-sufficient and even exporter, after launching and consolidating these new technologies in the current revolution of energy, so that within several years America it will surpass the Middle East. In two decades the demand will almost increase, but probably will be matched by the offer and it will relieve the pressure of population on prices.

The paper pulp exception

Some raw materials such as wood and paper pulp, every day use in packaging and other recycled products are not feeling the previous descents and even uncertainties. While some funds are experiencing losses, others like wood are radiating optimism. That is the case of Christophe Butz, co-manager of Pictet Timber, who predicts the start of a supercycle of the cellulose pulp from the new real estate and stock market boom in the United States, the problems of the Chinese supply and other evidences that didn’t exist ten years ago, as the supply limitations in Canada.