ETF Securities believes that the commodity super-cycle that started in the late 1990s is far from over, despite recent falls in commodity prices which have wiped billions off the firm’s assets under management.
The London-headquartered exchange-traded product (ETP) provider, which is best known for its leadership position in commodities, asserts that the main fundamental drivers of the super-cycle are still in force and that recent commodity price weaknesses are more related to business-cycle fluctuations and short-term commodity-specific supply increases than a change in structural fundamentals.
Nitesh Shah, a commodities analyst at the firm, said: “The weakness in many commodity prices over the past year has led a number of commentators to call the end of the commodity super-cycle. However, most commentators are in fact referring to the near-term outlook for a few specific commodities rather than the longer-term trend that characterises a super-cycle. ”
Shah sees ongoing urbanisation and rising affluence in emerging markets, and continued supply constraints as undiminished drivers of the super-cycle. “Rising urbanisation and increasing wealth in large-population emerging market countries will drive commodity-intensive consumption and investment over the longer-term, and supply constraints will likely keep upward pressure on prices.”
This stance is very much in line with that of Jim Rogers, the arch commodities bull, who recently teamed up with RBS to roll out a series of exchange-traded notes (ETNs) providing exposure to broad commodities as well as agriculture, energy, industrial metals and precious metals.
The main drivers of the super-cycle, according to ETF Securities:
- Urbanisation and industrialisation. Resource-intensive economic growth in emerging markets has been the main force behind the strong rise in commodity demand and prices over the past ten years. This process is expected to continue over at least the next 10 to 20 years. The rise in commodity demand over the past ten years has occurred most strongly in China and India. Both remain in the early stages of both industrialisation and urbanisation. With per capita GDP in these countries projected to triple by 2030, absolute demand for the commodity inputs necessary to produce the investment and consumption goods they will demand over this period is expected to be significant.
- Rising affluence. The size of the middle class in emerging markets is expected to rise at a rapid pace over the next ten years, and with it so will their consumption of commodity-intensive finished goods. Offices, middle-class housing, automobiles, roads, trains, airports and related infrastructure, refrigerators, washing machines, computing devices and meat for example are all highly commodity intensive to produce. Even as the economic growth of some emerging market countries becomes less manufacturing-led and more consumption-led, the absolute demand for commodities is expected to continue to rise.
- Supply constraints. The long-term supply of most commodities will remain constrained due to their increasing scarcity and rising costs of production. As a consequence, higher commodity prices will be necessary to ensure that supply meets demand. The costs involved in oil extraction and mining are set to rise. For example, with oil fields in current production rapidly depleting, more remote and expensive oil fields will have to be developed to meet rising energy demand. According to BP forecasts, world primary energy consumption will be 36% higher in 2030 than in 2011. Similarly the cost involved with metals mining are increasing, driven by rising energy, machinery and exploration outlays, as well as labour constraints. As mining costs rise it becomes uneconomic for companies to produce and explore, unless prices continue to rise to cover these costs.
However, not everyone is convinced the super-cycle has longer to run. Indeed, earlier this month analysts at Citi warned that 2013 would be the year in which the death knolls ring for the commodity super-cycle, ushering in a new decade of opportunities based on how individual commodities will perform against one another.
Fortunately for investors, there are ETPs to suit all views whether bullish or bearish. Short commodities ETPs, which provide inverse exposure to commodities, are offered here in Europe by ETF Securities and recent new entrant Boost, and in the US by PowerShares, VelcocityShares, ProShares and Direxion. These products allow investors to profit from falling commodity prices and can be paired with long products to exploit relative value differences and to capitalise on diverging trends in commodities markets.