Monday, February 9, 2009

"Holes in the Ground" – The End of the Commodity Super Cycle

From RGE Monitor:

Super Short Super Cycles

The commodity "super cycle" proved super short. The commodity "boom" is now officially a "bust". So what happened?

The rise in commodity prices was driven by the confluence of a number of factors. Debt driven growth in major developed countries drove strong growth (both export and domestic) in emerging markets, such as China and India. This, in turn fuelled, demand for resources. In a virtuous cycle, the growth drove demand in major commodity producers, like Russia, the Gulf, Australia, Canada and South Africa, whose strongly growing economies fuelled further growth globally by way of increased consumption and investment.

The effect of increased demand on prices was exacerbated by decades of significant under investment in commodity infrastructure (mineral processing; refining; transport infrastructure (shipping, ports, pipelines) driven, in part, by low commodity prices.

The commodity boom was aided and abetted by investors, especially leveraged investors such as hedge funds. Hedge funds used commodities to bet on strong global growth and catch the updraft in emerging markets indirectly reducing problems of direct investment. Commodities also provide significant leverage making them more attractive to hedge funds.

Traditional investors also embraced commodity investments. Commodities were seen as a separate investment class with low correlation to traditional investments enabling investors to improve investment returns and reduce risk simultaneously....

...Mark Twain once described a mine as "a hole in the ground with a liar standing next to it". The end of the commodity price cycle has revealed that standing next to the liar is a crowd of hapless bankers, analysts and investors....MORE

HT: Infectious Greed