The wheel may have come off the commodity super cycle as predictions from 1999 come back to haunt investors, governments and businesses.
Just before the turn of the century, eminent economists predicted a 15-year super cycle for commodity prices based on increasing demand from resource-hungry economies.
The prediction also warned that when the super cycle reached a peak, commodity cycles would plunge before some years of adjustment as supply again realigned with demand.
Now, economists and banks fear the brakes are well and truly on the super cycle.
Oil prices have bottomed out in the low to mid $60 a barrel after selling for years at around $100 a barrel.
Oil glut
Nations with an oil-based economy are now feeling the pinch of writing budgets based on selling the same amount of oil priced 40% higher than the market is achieving.
Russia has particular problems – again hiking interest rates to 10.5% as the rouble flat lines and inflation spikes.
Opec – mainly oil producers in the Middle East and North Africa – has pledged to keep churning out 30 million barrels of oil a day for the time being. Their position is undercut by cheap American and Canadian oil leaving a glut of supply pushing down prices.
The super cycle tenet was that improved technology would push down commodity prices as governments dependent on outside supplies would find ways to replace a resource with another or make extraction more cost-effective.
In the US, around 1,600 oil wells are outputting as many barrels as more than 2,000 accomplished only a couple of years ago.
Cheaper prices
Gold, silver, iron ore and copper prices are all slumping as the market changes.
Food is also cheaper – with the exception of cocoa and coffee, which have both been hit by bad weather.
The forecast is not another world recession, but decreasing inflation. Most countries with prudent economic government are already seeing inflation hover around 1.5% – 2%. The figures fit the mould from China to the US and UK.
Economists and analysts, including Goldman Sachs Chief Currency Strategist Robin Brooks have reported the slowing of the super cycle.
“A prolonged period of heightened commodity prices has stimulated producers to increase supply,” the analysts said. “We do not foresee a collapse in global commodity prices, but do expect substantial price falls.”
