The commodity supercycle: myth or reality? Part 6

Are there any market commentators who do not share this super-bullish stance? It turns out that there are a few of these around. First off, Jeffrey Christian, managing director of the CPM Group in New York City and author of the book “Commodities rising: the reality behind the hype and how to really profit in the commodities market.” One chapter in the book is entitled “The myths of the commodity supercycle and the Chinese consumer giant.” The title says it all: Christian does not buy into the commodity supercycle theory.

In his book Christian uses classical economics to explain what is happening in commodity markets. He is firmly opposed to the view that commodities are about to enter a supercycle that will last for many years. He adds that the history books are devoid of any references to long-lasting upward moves in commodities.

When asked about trends in commodity markets, Christian does acknowledge that China and other Asian countries will consume all kinds of commodities as their populations move toward a middle class standard-of-living. He maintains that classical economics explains the present behaviour of commodity markets as a result of an upward shift in fabrication demand, an upward shift in investment demand, and a lagged response on the supply side. He points out that while fabrication demand decreases when price goes up, investment demand responds inversely, so it increases when price goes up. Although investment demand increases volatility, Christian acknowledges that it also leads to sustained price rises.

Christian identifies a number of secular factors which have led to commodity markets behaving the way they do. He agrees that the upward shift in fabrication demand is a secular factor. He also says that business cycles seem to have become longer, with less recessions, and these recessions being shorter and shallower that those experienced in the past.

There are a number of trends which might have contributed to these changes, for example globalization, deregulation, automation and computerization. These are all secular trends, so their influence on markets is secular as well.

Christian says that the commodity bear market lasted for 20 years, from 1981 to 2001, during which time exploration activity has dwindled, and few new mines have been brought to production. This helps explain the slow pace of supply-side response to commodity demand during the bull market which has lasted seven years so far. He maintains that as production from new mines is brought on line, prices will come down, although not to the prices that were in force before the bull move.

As an example of supply-side response, Christian puts forward the situation in China. The country has increased gold production, and it is now the world’s largest producer of the shiny metal. Similarly it is moving to increase silver production, as well as copper and aluminum production. China will continue to increase production of raw materials. It will intensify exploration activity and will discover more mineral deposits. Christian believes that there are substantial opportunities to explore and discover mineral deposits in other parts of the world as well.

Christian does acknowledge that there are some restrictions on supply, but he firmly believes that these are not geological. Supply restrictions mostly stem from politics, time lags and prices.