The current and history's third commodities super cycle, which began in 2000, is far from over, and the major factors supporting it -- population growth and rapid urbanization -- would easily stay with us for another 15-20 years, according to a senior analyst at Societe Generale.
While acknowledging that "nobody really defines what a commodity super cycle is," and the current period might not be "as super," it is "not uncommon to have cycles within super cycles," Michael Haigh, SocGen's New York-based Global Head of Commodity Research, told a media round table in Singapore Monday.
Just as prices go up and down during those cycles within a super cycle, different commodities rise at different times, Haigh suggested, implying not all commodities needed to be consistently high all the time to define a super cycle.
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Price controls, the lack of investment, insufficient production and technological innovations are some of the reasons commodities behave differently during a super cycle, he said.
Copper is the best commodity to study in super cycles, Haigh said, noting that the base metal continues to trade significantly above its 90th percentile long-run cost of $4,500/mt.
Monday's London Metal Exchange copper settlement price of $6,765/mt puts it around 50% above its 90th percentile cost.
Fellow base metal aluminum is faring the worst, trading around 20% below its 90th percentile long-run cost. However, others are comfortably above their costs -- zinc (around 8%), lead (51%), nickel (14%) and tin (23%), Haigh noted.
Haigh said he was bearish copper and "fairly constructive" of aluminum and nickel.
Light sweet crude benchmark Brent of around $107/barrel Tuesday is nearly 19% above its long-run 90th percentile cost, which Haigh pegged at $90/b. "We are mildly bullish on Brent for the next six months," he added.
In support of his optimism over the continuation of the current commodities super cycle, Haigh cited global urbanization projections by the United Nations, which have 5 billion people living in cities by 2030, compared with 3.4 billion now. Urbanization bumps up demand for base metals as well as energy, the analyst noted. CHINA HARD LANDING
Meanwhile, a hard landing in China would choke off 1.2% of global GDP growth and would create a "turmoil in the financial markets and commodity markets," exacerbating all commodity price moves. Haigh sees such an occurrence as absolutely "devastating" for the base metals complex and energy commodities.
However, he underlined that SocGen's analysts are putting a relatively small 20% probability on a hard landing in China, which they define as 3-4% GDP growth rates for the country.
A 40% drop in China's manufacturing purchasing manager's index or PMI -- a commonly used gauge of the country's growth rate of economic activity -- as happened after the Lehman bankruptcy, would likely send Brent spiraling down to around $75/b, well below the $90-100 the Saudis need to meet their national budget, and also below the production cost of Canadian oil sands, Haigh said.
China currently accounts for roughly 40% of global base metals consumption, 23% of major agricultural crops and 20% of non-renewable energy resources, according to SocGen estimates.
Although a Chinese shock would send all commodity prices downhill, SocGen expects Brent and gold to recover within six months, as lower oil prices would give a leg up to global GDP.
According to the bank's calculations, every $10/b drop in oil prices adds 0.2% to global GDP growth. "So if you have a decline in oil prices, which would probably occur on a China slowdown, there will be an improvement in the GDP outlook," Haigh said.
Also, as commodity prices fall below their cost of production and remain there, suppliers would cut back production, helping prices climb back up, he added. RETURN OF FUNDAMENTALS
Separately, SocGen believes fundamentals are returning as a bigger component of crude prices, though not to the same extent as in the pre-Lehman days.
About 65% of the current Brent price can be explained by fundamentals, Haigh said. Ten years ago, fundamentals underpinned 80-90% of Brent price, he said. Following the 2008 financial crisis, fundamentals' share was reduced to 30-40% on average.
In line with its "back to basics" belief around the re-emergence of the "explanatory power" of fundamentals, the bank has just launched a new Supply Demand Commodity Index or SDCI, comprising 12 commodities with a dynamic allocation that is determined by the specific supply and demand driven models.
The index includes crude oil, gasoline, heating oil, natural gas, copper, aluminum, zinc, lead, corn, wheat, soybeans and cotton and sources publicly available supply and demand data on each of the commodities.
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--Edited by Irene Tang, firstname.lastname@example.org