"It is now clear that the commodity super cycle is over," wrote top Citigroup commodities analyst Ed Morse last week.
Bloomberg flashed the quote around the markets within minutes, making already nervous investors even twitchier.
“Super cycle” is shorthand for the sharp and sustained price rise that almost all commodities enjoyed over the last decade. Gold went from south of US$300 an ounce a decade ago to over US$1,900. Copper went from under US$2,000 per tonne to over US$7,000. The story was similar across many metals.
This surge in commodity prices was remarkable for a couple of reasons.
First, the surge in prices was big. Prices didn’t just double, they went up by factors of five or 10.
Second, the super cycle defied the century-long trend of real price declines for most commodities. If you look at the inflation-adjusted price for most commodities, they are significantly cheaper than a hundred years ago. Demand is up, but thanks to innovation by miners the cost of extraction is down even more.
Third, nearly all commodities benefited from the boom. This wasn’t just a gold boom or zinc surge.
Super cycle bulls said that rapid economic growth in big emerging markets - China, India, Indonesia, Brazil and South Africa have a collective population of over three billion people - was changing all the rules. Indeed, if consumers from Jakarta to Rio de Janeiro start using as much copper, lead and nickel as North Americans, the demand will be huge.
Fortunes were made on the commodity markets and mineral exploration boomed worldwide. The Metals Economics Group estimated that non-ferrous exploration spending went from around $2 billion in 2002 to over $20 billion in 2012.
Now, however, commodity prices are wobbly. Which might seem strange. You could be forgiven for assuming that conditions for the super cycle were still in place. After all, the IMF’s latest forecast for 2014 still has China growing at an impressive 8.2 per cent, India at 6.2 per cent and the big five southeast Asian economies at over five per cent. Places like Brazil and South Africa are a bit slower, but still above three per cent. Billions of people in those countries are still using more commodities every year.
So let’s look at Citigroup’s view. They point out that China’s growth is slowing, and that the country is entering a less commodity-intense growth phase. China’s government is trying to rebalance from infrastructure and investment-led growth - which use a lot of steel, copper and so on - to consumer-led growth. More spending on electronics, clothing and eating-out doesn’t have the same appetite for metal.
There are also other things going on. One is increased supply. If you spend $20 billion a year on exploration, you are likely going to find new mines. As some Yukon mining companies know all too well, many investors are already nervous to invest in new mines. There’s the risk that a new mine will come on stream just as competing mines from New Guinea to Mongolia start producing.
The Citi analysts talk about commodities markets becoming more “normal.” That is, commodities will go up and down compared to each other, equities, currencies and so on. No more one-way tickets to new 52 week highs. Each metal will have to be analyzed based on its own dynamics.
This means, for example, that to forecast the price of copper you’ll have to do more thinking than just saying “huge Chinese economic growth.” You’ll have to look at demand for industrial and electrical goods around the world, new mines coming on stream, labour strife in the big Chilean copper mines, stockpiles in China and so on.
What does all this mean for the Yukon? It sure would be interesting if Citi’s analysts put out a report on the implications for Whitehorse house prices.
One thing that seems certain is that market nervousness over new mining projects is not going away any time soon. The general wet-blanket effect of uncertain commodity prices will continue.
Also, if Citi is right about the commodity prices decoupling from each other, then we won’t be able to generalize any more about the “mining sector.” We will need to think about mining projects more individually. The future of Selwyn Chihong’s project near the N.W.T. border will depend on what you think about lead and zinc prices. Victoria Gold is, as the name implies, about gold. And the big Casino proposal, which aims to produce gold, copper and molybdenum, will require you to have a point of view on each of those three metals.
Further complicating life will be the infamous “supply curve” in each metal. This is where you put all the, for example, copper mines in the world on a chart and line them up from low-cost to high-cost. As copper prices fall, fewer of them will be viable. So you’ll need to know not just what the trend is for each metal, but also how competitive the mine is where you’re planning to be a contractor or apply for work.
It will be a trickier environment in which to make decisions about investments, contracts and jobs.
Of course, Ed Morse at Citi could be wrong. This could just be a blip in an even bigger super cycle. But you would have to be a bold investor to bet against him.
Keith Halliday is a Yukon economist and author of the MacBride Museum’s Aurore of the Yukon series of historical children’s adventure novels.