Share

End of super commodity cycle could bruise SA

Johannesburg - "The super commodity cycle is behind us as producers again care more about cost containment than expansion," according to economist Mike Schüssler.

In a report he wrote for TreasuryOne Schüssler explained that South African commodity prices are the lowest in over four years.

Using South Africa’s four main export commodities of platinum, gold, iron ore and coal it is clear that the current drop in the prices of these commodities is actually massive as the overall index dropped by 10.5% over the last three months.

The last few days saw further sharp declines in gold and platinum as investors exit precious commodities to re-enter American assets as they feel that rising interest rates will increase the cost of holding gold and platinum.

Coal is feeling the effect from the oversupply of energy products and iron ore is feeling the slower Chinese economy plus an oversupply.

Already the world’s two largest producers are talking of bringing down production costs, from about $27 to about $20 a tonne for BHP and for Rio Tinto - from about $21 to under $20 a tonne.

"Over the last 15 odd years many commodity prices rose substantially and that brought more production from commodity producers and also cost containment measures by users," said Schüssler.

"Today the platinum used in cars is half of that a decade ago and current efforts are to reduce that by about as much again. At the same time more platinum is being produced."

Fuel prices

He also pointed out high oil prices lead to major reductions in fuel usage in motor vehicles and planes.

At the same time new sources were found and the idea of peak oil declined as new drilling techniques allowed ever deeper offshore production. Also other sources such as shale gas reduced gas prices so that gas now costs only a quarter of electricity from about two thirds of the price of power for major smelters and heavy industry.

Coal competition

Coal had to compete again with not only nuclear power (which was often turned off in Europe and Japan, but on in China) but with solar, wind, and gas which had become much cheaper.

"Then of course the fact that, because of high energy costs many devices now use far less electricity. Such devices ranging from LED TVs, LED lights and energy efficient fridges, induction stoves and of course solar geysers," said Schüssler.

"So the higher commodity prices have had an effect in that demand changed and consumption patterns changed. At present, unless there is about a 2% to 3% cut back soon, oil supply will be more than demand in the beginning of 2015."

Why commodity prices are about to decline further

According to Schüssler, while it is difficult to forecast any cycle with 100% confidence there are now the first big signs that the commodity cycle will slip into a longer term soft mode.

"It is a known fact that higher American interest rates are normally bad for commodity prices, as the cost of holding them for investors apart from storage increases," said Schüssler.

"With five years of negative real interest rates behind us the CRB commodity price index is already taking a pounding. So any move up in American interest rates will probably be a big nail in the super cycle coffin."

In Schüssler's view it may take three or four years for positive real interest rates, at which point holding gold and other precious metals will no longer make sense.

"But en-route to positive real interest rates one can expect more declines in commodity prices than increases," he said.

Demand and supply

The next big factor Schüssler pointed out is that the demand for many commodities is growing less than supply is growing, particularly metal commodities.

"The higher prices have helped the recycling industry again get its groove back. The world has many people who look for scrap metal, platinum from older cars, bottles and plastic. In some cases, like glass, the world already has too much with the recycling," said Schüssler.

Change in China

As a third reason for Schüssler thinking the commodity cycle is on the decline, is the forecast that China itself is becoming more services orientated.

"The investment led growth in China is slowing and becoming more of a service led growth. And the Chinese government is trying to slow growth too. It is not great if the number one commodity importer slows and undergoes a structural change to services at the same time," he said.

Most forecasters from the Royal Bank of Canada to Goldman Sachs are all indicating lower commodity prices in general.

"This gives one the rather sad combination of falling demand, increasing supply and a monetary headwind, given that most commodities are priced in US dollars. This is the complete inverse of the super cycle conditions that have prevailed through most of the last fifteen years," he said.

- Fin24

We live in a world where facts and fiction get blurred
Who we choose to trust can have a profound impact on our lives. Join thousands of devoted South Africans who look to News24 to bring them news they can trust every day. As we celebrate 25 years, become a News24 subscriber as we strive to keep you informed, inspired and empowered.
Join News24 today
heading
description
username
Show Comments ()
Rand - Dollar
18.99
-0.2%
Rand - Pound
24.09
+0.1%
Rand - Euro
20.60
-0.0%
Rand - Aus dollar
12.37
+0.4%
Rand - Yen
0.13
+0.5%
Platinum
904.45
+0.2%
Palladium
999.75
-0.6%
Gold
2,152.91
-0.4%
Silver
24.91
-0.5%
Brent Crude
86.89
+1.8%
Top 40
65,985
-0.4%
All Share
72,185
-0.3%
Resource 10
53,353
+0.1%
Industrial 25
99,500
-1.0%
Financial 15
16,667
+0.3%
All JSE data delayed by at least 15 minutes Iress logo
Company Snapshot
Editorial feedback and complaints

Contact the public editor with feedback for our journalists, complaints, queries or suggestions about articles on News24.

LEARN MORE
Government tenders

Find public sector tender opportunities in South Africa here.

Government tenders
This portal provides access to information on all tenders made by all public sector organisations in all spheres of government.
Browse tenders