Citibank calls the end of the Supercycle

A new report from Citi Research, a division of Citigroup Global Markets, says returns have peaked for the mining sector, and that this is the year that “the death bells ring for the commodity supercycle after its duly noted ‘sunset.’”

The report states that “this year should provide full affirmation that the commodity supercycle has finally ended. The ‘commodity supercycle sunset’ appeared on the horizon shortly after the 2008–2009 recession, and celebrations for the ‘supercycle funeral’ began in 2011, with 2013 perhaps ushering in a ‘supercycle funeral after-party’ in which investors could revel in new opportunities.”

In the supercycle’s place comes “a new decade of opportunities based on how individual commodities will perform against one another and against broader market indicators, such as equities or currencies,” the report states.

The authors of the 25-page report — who are metals and mining analysts at the bank’s London and New York offices — also point out that the recent separation of commodities from equity markets in some ways represents “a return to normalcy,” given “the sensitivity of commodity prices to coincident conditions and of equities to anticipatory economic changes.”

They also note that “denomination effects of changes in the relative value of the U.S. dollar” would impact commodities, and that their bullish view of the U.S. dollar over the long-term “is likely to place an even further drag across the asset class this year.”

Investors during the supercycle decade focused on supply conditions, they add, while in the decade ahead they need to get a better handle on demand conditions as economies move towards consumption-led growth, as opposed to investment-led growth. “Shifts in underlying investment patterns in China and other emerging markets are a critical source of change for aggregate consumption, as China and other emerging-market growth shifts from more commodity intensive fixed-asset investments and industrial production growth to household-based and service sector growth.”

The bank’s China economists warn that economic growth in the country could slow in the second half, and that real gross domestic product growth could fall from 8% and 8.2% in the first two quarters of 2013 to 7.7% and 7.5% in the third and fourth quarters, for an annual 2013 growth rate of 7.8%. They expect moderate growth next year, sliding to 7.3%. Other possible contributors to declining growth rates might include a possible deterioration of the H7N9 avian influenza situation, which they say could slow China’s economy.

Among the potential constraints on growth in China are inflation, which could encourage tightening by the People’s Bank of China; overcapacity; more stringent and better-enforced environmental rules that could affect the steel, cement, petrochemical, non-ferrous metals and thermal coal power sectors; and a taut financing environment. Other areas that could slow growth include curbs on financing activities; more restrictions on the property sector; restraints on bank lending; central government limits on local government spending and debt; and anti-corruption campaigns.

In terms of its commodities outlook, the Citibank analysts note that copper produced by the major-listed miners grew 2.7% in the second quarter, 8.2% in the third quarter and 9.7% in the fourth quarter of 2012, and that this trend would continue into next year based on brownfield and greenfield expansions, saying that “we expect a continued acceleration in 2013, with growth from Escondida, a second-half start from Rio’s major Mongolian mine project, Oyu Tolgoi; an 30% growth at Freeport’s Grasberg mine, full ramp-up of Eurasian Natural Resources Corp.’s DRC-based Frontier mine; and production improvements from Anglo operations, to name a few.” Citi forecasts mine supply growth of copper of 1.1 million tonnes this year, or 7.1%.

Meanwhile, Chinese demand for copper will be slower than expected, they argue, estimating that slower property and energy infrastructure building will cut China’s copper consumption growth to 5.9%.

For iron ore, Citi’s analysts are forecasting “an average price this year of US$128 per tonne, but are expecting a bearish second half, with a forecast price of US$118 per tonne.” And “with Chinese steel prices at three-year lows, and negative margins,” they expect Chinese steel producers to “cut production to stabilize prices.”

The report says investors have accelerated their “bailout from gold” as other asset classes “grow in attraction, while inflation fears are further and further postponed.” They note that net long-managed money positions on Comex “have halved over the first three months of the year,” and that “hints of an earlier-than-expected end-of-asset purchases have removed focus from the potential longer-term inflationary impact of easing.”

They point out that physical gold holdings in exchange-traded funds are down by nearly 434 tonnes so far this year, “with levels falling by 174 tonnes in April alone.”

The analysts forecast that the gold price will average US$1,555 per oz. this year, and US$1,435 per oz. in 2014.