Commodities Super Cycle

Commodities Super Cycle: Introduction

The Commodities Super Cycle was a boom period between the years 2000 to 2014 where many commodity prices rose and fell. The boom was largely due to the unprecedented high demand from the People’s Republic of China as the country underwent a period of rapid economic growth (urbanisation and modernisation) well as the resulting concerns over long-term supply availability (see Figure 2).

Many commodity prices surged in the early 2000’s and continued to reach historic highs until a down-turn experienced during the Global Financial Crisis (“GFC”), however prices rebounded until the peak of the cycle during 2011 and have since returned to their pre-GFC norms.

By analysing Figure 1 below, many commodities started experiencing exponential growth in prices in the same time that the China real GDP growth rate was reaching double digits. Commodity prices have responded negatively to this government-engineered slowdown on the back of concerns that Chinese manufacturing will no longer require as many raw materials as it did from 2000 to 2011. As the Chinese economy entered into a transition from a debt driven to consumer driven economy the real GDP growth rate declined, resulting in the commodity prices returning to their historic pre-GFC prices.

Commodities Super Cycle
Figure 1: Commodities Super Cycle (World Bank)

 

History of Chinese Economic Policies

Since the introduction of economic reforms, China’s economy has grown substantially faster than during the pre-reform period, and, for the most part, has avoided major economic disruptions. From 1989 to 2015, China’s annual real GDP averaged nearly 10%. This has meant that, on average, China has been able to double the size of its economy in real terms every eight years (see Figure 2).

The global economic slowdown, which began in 2008, affected the Chinese economy. China’s real GDP growth fell from 14.2% in 2007 to 9.6% in 2008, and slowed to 9.2% in 2009. In response, the Chinese government implemented a large economic stimulus package and an expansive monetary policy. These measures boosted domestic investment and consumption and helped prevent a sharp economic slowdown in China.

From 2009 to 2011, China’s real GDP growth averaged 9.6%. China’s economy has slowed in recent years real GDP growth fell from 10.4% in 2010 to 7.8% in 2012, to 7.3% in 2014. The IMF predicts that China’s real GDP growth will to slow to 6.5% in 2016 (Source: China’s Economic Rise: History, Trends, Challenges, and Implications for the United States, Wayne M. Morrison,October 21, 2015).

China Real GDP Growth Rate
Figure 2: China Real GDP Growth Rate

Commodities Super Cycle & Chinese Administrations
Figure 3: Commodities Super Cycle & Chinese Administrations

 

2016 Market Outlook

Since 2011 most of the commodities have been in a bear market, however since January 2016, many commodities have risen above their averaged price in December 2015. The price of iron ore and gold have rebounded comparably the best compared to others. At the end of April iron ore fetched $60 per tonne, a 50% increase since its low of $40 per tonne in December. At the end of April gold fetched $1,240 per ounce, a 16% increase since its low of $1,068 per ounce in December (see Figure 4).

Commodity Prices YoY Growth
Figure 4: Commodity Prices YoY Growth

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