The world's commodity supercycle is far from dead

The Telegraph ^ | 12/2/2012 | Ambrose Evans-Pritchard

[bruinbirdman]

Great resource booms usually end abruptly, catching almost everybody by surprise.

Studies by the World Bank covering two centuries of data sketch a pattern of 10-year supercycles, followed by a slide for the next 20 years or so as excess investment leads to a flood of supply. The long bear market can be cruel for those hanging onto to resource stocks, convinced that the rebound must be nigh.

Mark Ryder, Australian investment chief for UBS, says we are reaching just such an inflexion point as China’s manic construction phase gives way to more sedate growth, and Europe, America, and Japan take their fiscal medicine. "The commodity super cycle’s end is at hand. The scene is set for a momentum shift," he said.

This view is daily dinner talk in Australia, a country that lives off iron ore and coal sales to China - and described contentiously by Dylan Grice from Societe Generale as "a credit bubble built on a commodity market built on an even bigger Chinese credit bubble".

It is starting to take hold as the new consensus in the City where funds are keeping a close eye on the mining trio of BHP Biliton, Rio Tinto, and Brazil’s Vale. All three are battening down the hatches as hopes fade that this year’s 23pc fall in iron ore prices will soon reverse. Rio is cutting $5bn in spending by 2014. Vale is expected to pare back its $40bn investment plans next week.

But it is a report by Citigroup’s Edward Morse that has most rattled resource. He claims that America’s shale gas revolution -- which has cut US natural gas prices by 70pc -- is a taste of what will happen across the gamut of commodities as vast investment comes on stream. The inference

[1010RD]

Good. Lower prices on everything is what is needed, let interest rates rise, kill RE the rest of the way and let new growth begin.

[1010RD]

Last time I was in China there were blocks and blocks of 30 storey buildings sitting empty. I suspect AEP is wrong. They’ve got plenty of overcapacity for the foreseeable future.