The massive rise in metal prices that marked the so-called commodity super-cycle is unlikely to be repeated during the next decade. Instead, supply and demand fundamentals are going to play an increasingly important role in determining metal prices, as demand growth slows.
This is the view of Red Door Research MD, Jim Lennon, who told Mineweb on the sidelines of the opening day of the Investing in African Mining Indaba that he expects a return to a more cyclical performance in commodities.
The reason for this, he explained is that the supercycle was the result of a period of extreme shortage driven by the unexpected nature of Chinese demand growth and the lack of belief by suppliers that it would be sustained.
And, while it is theoretically possible for other countries to step into the void left by this slowing growth in China, such a huge jump is made more difficult because China massive jump in growth coincided with a a lot of excess capacity in energy, in commodities around the world.
“Other economies have got to embark on the same process at a period where commodity prices are very elevated, energy is very, very tight and it will be a struggle for those economies,” he told Mineweb.
But, Lennon points out, slowed. That confluence of events is unlikely to happen in the same manner again as it was in large part facilitated not only by the fact that Chinese demand was so strong, but also that supplies of the various metals were available.
That is also not to say that Chinese growth has disappeared. Indeed, as Lennon points out, “China is not a fully developed economy; urbanisation is still only 50% so we still see the potential for growth.”
He adds, that if one compares the growth of China and its urbanisation to other countries over history, it is largely in line with other urbanisation stories.
“The growth is going to remain strong in volume terms, even though the growth rates are slowing, the volume growth, the requirements for new capacity remain as challenging as before.”
CRU Strategies CEO, Phil Newman agrees, pointing out, that if you take a basket of different commodities, iron ore, copper, lead zinc, gold, coal, you can see the value of that market is 4 times what it was ten years ago.
“We have been through a real big boom, but we haven’t come back anywhere near to where we were in the late 1990s. I personally believe that things will slow down a little going forward but we are in a better place and we are in a much bigger industry than we were 10 years ago.”
Newman also agrees that prices are currently more determined by fundamentals than has been the case over the course of the last few years. “The market gives pretty clear signals that the moment - if you look at just the prices of products - the market is saying out there, we need more copper. The price of copper is pretty good, over $7,000 per ton and it has been over $7,200 to $7,300 for most of last year, even when people said, it’s going to fall… It stayed strong because the market needs copper.”
It’s not abnormal to see prices go up and prices go down, and the market responding, he says, but adds, there is always a lag
“It takes 10 years to build a new large mine… that makes for slight imperfections in the mining market, and that feeds the cyclical nature of it.”
This article appears courtesy of Mine Web. To read more international mining and resources finance news click here.