Why the commodities super cycle was a myth
August 31, 2015
The Financial Times
In 1980, the economist Julian Simon challenged doom-mongering biologist Paul Ehrlich to a bet that the prices of any five metals would be lower in 10 years’ time. He won, and made his point: over the long run, technological progress means commodity prices are likely to fall in real terms.
From the early 2000s, many investors forgot that lesson. The idea that there are decades-long “super-cycles” in commodity prices has some respectability: a 2012 paper by Bilge Erten of the UN and José Antonio Ocampo of Columbia University found evidence for four such cycles during the period 1865-2009. But in the bastardised form that became popular in the 2000s , the concept gained less honourable currency, as a story that commodities were a one-way bet upwards.
With oil down about 57 per cent from its peak last June, and copper and iron ore down about 50 and 70 per cent respectively from their peaks in early 2011, it has become clear that story was profoundly misleading. Whether or not the supercycle exists, the regular old cycle definitely does, and there is nothing very super about it at all.
Timing is everything. Using different periods and different metals, Ehrlich could have won his bet against Simon. Anyone confident in oil’s ability to meet rising demand looked pretty foolish as prices rose from about $10 per barrel in 1999 to over $140 in 2008. Oil, iron ore and copper are still well above their levels in 2002-03.
The past five years have nevertheless dealt a fatal blow to the popularised version of the supercycle story: that inexorably rising demand in emerging economies and constrained supplies of many commodities would inevitably put prices on a rising trend. With China apparently facing a future of slower growth than in the past two decades, and probably a shift away from resource-heavy investment spending towards consumption, the assumptions of strong long-term demand growth have been called into question.
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