In an article about a year ago, we addressed the “Boom-Bust” nature of the minerals industry with focus on the causes of this characteristic, which, we noted, are basically rooted in fluctuations in the larger economy.
The logic is simple: It starts with a shock to the economy caused by wars, natural disasters, etc. This results in changes in consumption, capital investment and/or government spending that become the transmission mechanism for changes in commodity prices.
Fine. But how does this help us going forward?
To put it simply, to understand where you are going, you need to know where you are and how you got there. We know, for example, that over the past four decades, there have been three major bull markets (i.e., periods of rising prices) in commodities. The most recent of these — sometimes called the “Super Cycle” while it was underway — occurred in the early 2000s until the 2008-2009 market crash. The graph shows mineral commodity prices during and beyond this period. Prices of these “industrial commodities” basically quadrupled up until the crash in 2009, driven by industrial demand for raw materials.
The market rebounded quickly in 2010 because central banks were able to contain the contagion to financial markets and commodity producers and consumers were able to complete contracts and deliver contracted goods and services. But, the subsequent multiyear decline in prices that followed suggested that the financial collapse had kicked the wind out of the markets. Even the gold market: Gold prices did not collapse in the 2008-2009 financial meltdown because it was considered a financial safe haven. However, it peaked two years later and has yet to see the $1,800 level again.
But, what led up to the “Super Cycle”? Basically, a surge in emerging market economies prompted a surge in demand for basic commodities. At this point, the term “BRICs” entered our lexicon – an acronym for Brazil, India and China – three large, developing nations that account for over one-third of the earth’s population. During the “Super Cycle,” these (and other) developing countries experienced double-digit rates of growth in GDP compared to 2 percent or less in the developed economies of North America and Europe.
The significance of these growth rate differentials for the commodity price cycle is fairly straight forward. Growth in developed economies, which are service based, increases demand for services requiring human inputs. Think of a company like Amazon, besides the stuff you get delivered from them, what are they selling? Primarily logistics—getting the stuff to you cheaply and quickly, and logistics is a human skill (a plug for STEM educations).
In developing economies, growth and rising incomes lead to a demand for “stuff” — public infrastructure like roads, bridges, sanitation systems. And, consumer goods where the major inputs are basic materials like iron, copper, and the whole range of industrial commodities. We may live in an information age in the developed world, but the vast majority of the world’s population still wants “stuff,” and that requires raw materials.
Historically, the spark that sets off growth in developing markets has been growth in the developed world. On this point, the consensus is fairly positive. The International Monetary Fund, World Bank, and others are projecting robust growth in North America and Europe compared to the post-recession decade. The same forecasters are predicting an even stronger rebound for the “BRICs” and other developing countries. All this is pointing to a new commodity cycle. We’ll have to wait and see, but the preconditions are here.
Finally, if you are interested in exploring the implications of this trend and possibly profiting from it, there are a number of exchange traded funds (ETFs) that hold stocks in companies positioned to profit from it. There are a fair number of ETFs to choose from with varying emphases on regions and industries. A small sample (without recommendation of any in or not in the group are XLB – SPDR basic materials fund, CHIM – China basic materials fund, and MXI – global basic materials fund. These and other options can be found by visiting your favorite search engine.