The End of the Commodity Super Cycle?

It seems like most analysis these days are extreme in some fashion or another.  We’re either falling off a fiscal cliff, going into a recession or we’re at the end of some particular type of era where the world will never be the same.  In short, analysts and pundits seem to be making an increasing number of “this time is different” predictions.  The reality is that the economy is usually pretty boring. I like to view the economic machine as a big, boring, lumbering entity that is really pretty slow moving and unsexy.  We aren’t normally reverting to the mean in either direction.  But we have a tendency to believe everything occurring in the now is more important or impactful than it really is.

Anyhow, that was the first thought that came to mind when I read this report from CitiGroup analysts calling for an end to the commodity super cycle (via Business Insider):

“Going forward, Citi forecasts that China’s overall real GDP growth might steadily fall from +9.2% in 2011 to +5.5% by 2020. Furthermore, overall investmentgrowth, which averaged +13.6% from 2001 to 2009, would decline to only an average of +6.2% from 2013 to 2020, a slowing by a factor of roughly a half.

…Both the overall slowing and the restructuring of the Chinese growth model should mark a watershed in global commodity markets, if only because China had played such an outsized role in global commodity markets in the past decade. For many industrial metals, China in fact was responsible for all of net global demand growth after 1995, and also is one of the largest global consumers of energy, grain, and soft commodities.”

Now, I’m not a big commodity bull.  In fact, I’ve been pretty critical about investing in commodities because the real returns over the long-term are terrible.  But there really isn’t anything that sexy occurring in commodities at present.  I’ve seen a lot of bubbles and predicted quite a few.  I’ve even discussed many supposed bubbles that I said weren’t bubbles (like the “bond bubble” everyone was talking about in 2009/10).  So I like to think I have a decent eye for “bubbles”.

I’m not going to run any fancy analysis like the analysts at Citi have probably done.  Then again, I don’t really think you need to.  Sometimes, just taking a 30,000 foot view is enough to put things in the proper perspective to avoid making extreme predictions.  It’s one thing when prices go parabolic like we saw in 2008 in oil prices, but there’s really nothing that unusual occurring in broader commodities.  If you look at the 20 year price action we’re only slightly above the 20 year mean in the CRB Index.  So, are commodities overpriced?  Maybe.  Bubble, or end of an era?   That sounds extreme to me….


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Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.

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  • SS

    most “analysis” these days is hyperbolic page view grabbing crap. see zerohedge or business insider.

  • SC

    Fair enough,BUT a mean usually has over and unders .that’s why it is called a mean.So using your 30,000 feet just take a glimpse and say where you tthink price has spent the most time. After that to return to mean where should it spend the most time in future.

  • Bernie

    I know you’ve linked to his blog before, but in this post written back in September Michael Pettis was very bearish on commodities.

    Just in case you missed it.

  • Mozaic

    Regardless of if the supercycle has finished or not, I can confirm locally that Australia is taking a severe kicking from it. Iron Ore in particular has lost considerable ground.

    The treasury is bleating about trying to keep the economy growing by building lots of houses (what can possibly go wrong with that) and generally the population gradually is coming around to the prospect that we are in trouble, or at least the population that takes an interest in trade.

    Interesting days.

  • Mozaic


    I agree in general. I think you are being too generous with zerohedge though. I used to read them back in 09 when they first appeared, and there was always interesting info and contribution. In the last few years it has deteriorated into Jew Haters Anonymous and Conspiracy Theory Central, using regurgitated articles from other sources, sadly.

    BI is what it always has been, click bait.

    (posted this before and it went awol – I apologise in advance if we get 2 copies).

  • Mozaic

    Hi Cullen,

    Can you please check if my response (last one) got caught in the spam filter. I suspect one of the words used may have done it. I’m sure you will find it was used appropriately.


  • Geoff

    The last peak in the Kondratyev Wave was in 1980. Adding 54 years, which is the typical length of a K-wave cycle, the next peak shouldn’t be until around 2034.

    Of course, things may not be that simple :)

  • godot10

    They fundamentally changed the methodology of calculating the CRB index in 2005. It is now pretty much just an oil index.

    It is better to look at the CRB using the methodology prior to 2005, the continuous commodities index, CCI.

    So far only 1 billion people have been raised out of subsistance poverty to the global middle class. There are still a lot more poor people whose living standards can be raised. There is still a lot of potential for commodities if another couple of billion poor people move to the middle class.

  • David

    More likely it will be really boring with commodities from here. China ate up so much copper and iron ore over the past decade that they have to slow down from here. This is not to mention all of the massive cement plants they built over there. The softs should probably fall a little from here and if we continue to ramp up oil production and increase energy efficiencies WTI should settle up in the 60’s, which is still relatively high. Then again, we are always prone to doing dumb things so Wall street could always create a boat load of structured products linking oil and sugar prices together and leveraging them 100:1 :)

  • Pete

    We didn’t have a global economy 20 year ago. That chart can go either way, it can go a lot higher too. If you think that the global central bankers all do the same easing things, the price of everything will go higher, not lower.

  • Johnny Evers

    ‘Commodity’ is a pretty big tent. I’m not sure it makes sense to lump gold, oil, copper, soybeans, sugar, hogs and cotton in the same index.

  • The Undergrad

    Sorry for nitpicking, but the first sentence should read, “It seems like most analysis these days are extreme in some fashion or another” no?

    Anyways, you can blame the Chinese for the end of the hard commodity super cycle.

  • Cullen Roche

    english is my second language. My first language is grunting and mumbling.

  • bart

    ” In fact, I’ve been pretty critical about investing in commodities because the real returns over the long-term are terrible”

    And on the intermediate or shorter term, when stock returns blow chunks like 1966-1982 or 2000 to date, commodities and hard assets are star performers.

  • bart
  • Dismayed
  • Cullen Roche

    “Called” is a bit generous. Wray’s not a trader obviously and as someone with a market background I don’t think it’s accurate to claim Wray makes prescient market prognostications. Mosler does that. Not Wray. Also, Wray (and all of MMT) has been describing the ill-effects of money manager capitalism for 20 years (even longer if you go back to his days with Minsky). And commodities were down 50% at the time Wray published that piece. They’re flat since then. That research piece was not prescient at all.

    MMT likes to claim it gets lots of things “right”, but the reality is that MMT has been a broken record for 20 years and the financial crisis validated a few market calls (after years and years of being wrong). As a market guy I find this “we’re right about everything” mentality to be rather disingenuous. After all, where is Wray’s bulging trading account from all these great predictions? Oh right. He doesn’t have a trading account because he doesn’t want to promote money manager capitalism (but like most Americans he probably has his own retirement plans and brokerage account at some big bad horrible bank).

  • bart

    “In fact, I’ve been pretty critical about investing in commodities because the real returns over the long-term are terrible.”

    Yes, that’s true.

    But during long periods like 1966-1982 or 2000 to date, commodities beat stocks substantially. Ignoring those facts in my opinion is not wise.

  • bart

    ooops, dupe – apologies.

  • exertia

    Cullen, a lot of notable Hedge Fundies including Chanos and Einhorn have been sceptical about steel mfrs. and iron mining cos. lately. You can check their presentations on Marketfolly.

  • http://na Volar
  • jt26

    As much as I hate parroting the BIC story (forget the R). You only have to compare these places to 20-25 years ago. The problem is their society and governments: will they become like Singaporeans and Koreans, or Greeks and Russians? So goes commodity prices.

  • IMF

    Pettis also wrote a month or so ago comparing the US government debt levels to those in Europe. So I think we need to consider the sort of economics prism he views things by. The concept of currency issuer/ currency user seems to be foreign to him and therefore we read a lot from him about chinese government debt. Regardless of what you may think about what the debt is financing*, the government debt itself is unlikely to be a problem.

    * “bridges to nowhere” cliche. Sure I can understand why that wouldn’t see a good use of money but am unclear about how those sorts of government “investments” differ from military spending in which you invest in things e.g. bombs, whose sole purpose is to be destroyed.

  • 3d1k

    Hi Mozaic – I beg to differ just a little. Iron ore has retreated from historical highs but is holding well enough post $100/tn, demand from China remains thus far reasonable. My feeling is there is along way to go yet. Statistics support the Australian economy continuing to travel well (lowish inflation, gdp growth, near full employment) but with growing downside risk. If the commidities boom goes but, we will be in trouble – but only trouble deferred via our good fortune to have had resource commodities in the first place!

  • Dismayed

    Wray is an academic, not a trader. And you are a trader, wrapped up in self promotion. So what? There are still some interesting things on your site – and much to disagree with. I mean, seriously, people in your MMR framework want to maximize free time? So the unemployed have reached nirvana? You tossed the useful, though limited, concept of utility for that?

    All the same, your sectoral balances analyses are useful. But that’s applied MMT.

  • Cullen Roche


    A few things. First, thanks for finally proving that you’re just an MMT troll posting links back to MMT sites. I figured that’s what you have been doing most of this time. Your veiled insults, linking and total lack of understanding of MR make that abundantly clear now.

    On that point – we haven’t called it MMR since its earliest days. It’s MR (with one M) and has been for about 9 months now. Also, nowhere in our literature do we discuss “free time” so I have no idea where you came up with that. Our primary focus is on utility and production so again, I don’t know how you can claim to be familiar with MR and say such silly things. You clearly aren’t at all familiar with our work, which isn’t surprising given how little effort MMTers have put into even basic concepts like S = I + (S-I). My guess is you only read PC because you still think “MMR” is something remotely close to MMT which would be totally wrong by now. But you haven’t updated yourself on the material so you don’t know.

    Lastly, the sectoral balances is not MMT. That existed before MMT was even created. MMT is really just Knapps state theory, Minsky’s ELR and Godley’s SFB all rolled up into a nice neat presentation. The only original or “modern” stuff in MMT is the reserve perspective applied to modern banking. And it’s totally wrong. The idea of the reserve system being this govt centric system where the “real money” resides (or the money that is “leveraged” in some weird alternative jargon for the money multiplier, even though you all reject the money multiplier??) displays a total lack of understanding of the relationship between inside money and outside money. This conflict in thinking is on display every day when MMT says banks serve “public purpose” and Bill Black laces into a new banking entity in a post at NEP. You guys downplay the role of inside money, but then complain about how the banks corrupt the system with it every single day. You’re trying to have it both ways by claiming inside money is less significant than outside money, but that the banks are somehow the bad guys even though they don’t even control the most important (according to MMT) type of money. It’s a contradiction so obvious that you’d have to be politically biased to miss it….Frankly, I am ashamed that I studied MMT and wrote about it here for a full year before I realized it. Silly me.

    Oh well. I don’t know why I waste my time with MMTers any more. I know none of you will change your minds because you’re too enamored with the political agenda behind MMT to care about anything else….So good luck getting a job guarantee passed in this country. Unfortunately, the obsession with politics is distracting from a lot of other good material in MMT. It’s too bad really because you guys have a lot to offer the world of econ.

  • Geoff

    That was actually an excellent summary of the differences between MMT and MR. I know you’ve been over it hundreds of times before, but some of us appreciate the repetition, which is the mother of learning. Thx.

  • David H Miller

    Most of the estimates suggest the world is adding about 75 million people per year. That’s about the same as adding the combined populations of Tokyo-Japan, New York-USA, San Paulo-Brazil, and Bejing, China. All those people, regardless of where they live, have to eat and create demand for agricultural commodities. They will all consume goods and services to various degrees and create demand for energy and industrial metals directly or indirectly. Considering this, I have a hard time buying the Commodity Super Cycle is ending story.

  • Cy Hailow

    @ Cullen.

    To look at commodity trends, supply demand balances, the slope of “learning curves” etc using 20 years data is far too short. Look at a 100 year view and 2003-2012 prices have been way above trend much as the 1990s were way below.

    Sadly these timeframes are 10-20 times longer than the horizon of your average investor. Anyone who wants to make serious money in commodities from investing as opposed to trading has to see generational opportunities such as in 2003 when demand was rising and re-investment was at decade lows. Now? Who knows.

    What we do know is current / pipeline investment is high (Australia, Canada + BRICs) just as China’s demand is likely to cool. Investment conclusion “caveat emptor”. PS I didn’t see it in 2003.

  • Bond Vigilante

    It depends on what’s going to happen in the next leg of the GFC. But in general I would say that the demand for commodities in general will go down in the next decade.