"If China Killed Commodity Super Cycle, Fed Is About to Bury It"
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From Bloomberg:
For commodities, it’s like the 21st century never happened.
The
last time the Bloomberg Commodity Index of investor returns was this
low, Apple Inc.’s best-selling product was a desktop computer, and you
could pay for it with francs and deutsche marks.
The gauge
tracking the performance of 22 natural resources has plunged two-thirds
from its peak, to the lowest level since 1999. That shows it’s back to
square one for the so-called commodity super cycle, a hunger for coal,
oil and metals from Chinese manufacturers that powered a bull market for
about a decade until 2011.
“In
China, you had 1.3 billion people industrializing -- something on that
scale has never been seen before,” said Andrew Lapping, deputy chief
investment officer at Allan Gray Ltd., a manager of $33 billion of
assets in Cape Town. “But there’s just no way that can continue
indefinitely. You can only consume so much.”
If slowing
Chinese growth, now headed for its weakest pace in 25 years, put the
first nail in the coffin of the super cycle, the Federal Reserve is
about to hammer in the last.
The first U.S. interest rate increase
since 2006 is expected next month by a majority of investors, helping
push the dollar up by about 9 percent against a basket of 10 major
currencies this year. That only adds to the woes of commodities, mostly
priced in dollars, by cutting the spending power of global raw-materials
buyers and making other assets that generate yields such as bonds and
equities more attractive for investors.
The
Bloomberg Commodity Index takes into account roll costs and gains in
investing in futures markets to reflect actual returns. By comparison, a
spot index that tracks raw materials prices fell to a more than
six-year low Friday, and a gauge of industry shares to the weakest since
2008 on Sept. 29. The biggest decliners in the mining index, which is
down 31 percent this year, are copper producers First Quantum Minerals
Ltd., Glencore Plc and Freeport-McMoran Inc.
With
record demand through the 2000s, commodity producers such as Total SA,
Rio Tinto Group and Anglo American Plc invested billions in long-term
capital projects that have left the world awash with oil, natural gas,
iron ore and copper just as Chinese growth wanes.
"Without fail, every single industrial commodity company allocated capital horrendously over the last 10 years,” Lapping said.
Drowning in Oil
Oil
is among the most oversupplied. Even as prices sank 60 percent from
June 2014, stockpiles have swollen to an all-time high of almost 3
billion barrels, according to the International Energy Agency.
That’s due to record output in the U.S. and a decision by the
Organization of Petroleum Exporting Countries to keep pumping above its
target of 30 million barrels a day to maintain market share and squeeze
out higher-cost producers.
A Fed move on rates and accompanying
gains in the dollar will make it harder to mop up excesses in
raw-materials supply. Mining and drilling costs often paid in other
currencies will shrink relative to the dollars earned from selling oil
and metals in global markets as the U.S. exchange rate appreciates.
Russia’s ruble is down more than 30 percent against the dollar in the
past year, helping to maintain the profitability of the country’s steel
and nickel producers and allowing them to maintain output levels....MORE
