Commodities Super-Cycle Near Its End

The commodities super-cycle has been a major bonanza for a lot of people, especially for economies rich in natural resources. These cycles happen ever so often; and when they last, they typically last for a long time. We’ve been in one for 13 years since 1999 and it’s been a gold rush ever since, but according to technical experts we are near the end of this bullish cycle.

All good things must come to an end; in this case 2013 may just be the end of the commodities super-cycle. Of course on a fundamental note it could continue, considering exogenous factors such as China’s growth and other supply constraints. But already major mining corporations are scaling back their capital expenditures on mining exploration due to the sharp correction experienced in precious metals.

As reported by the Wall Street Journal, “Last week BHP Billiton, the world's largest diversified miner by market value, said it will adjust its $80 billion, five-year capital-expenditure program while taking into account its cash-flow generation expectations.” A recent Yahoo! Finance article also confirms the trend for China’s slowing growth rate. In it they cite Credit Suisse analysts predicting 7-8% growth over the coming decade. That’s still well above the average for the developed western world, which will most likely be no more than 2-3% growth over the coming decade.

So far the overall commodities index tracked by UBS is up a breathtaking 78% since 1999, the beginning of the super-cycle. However, we could be very close to end of this cycle.

When commodities go up it usually cuts into corporate profits and causes massive price inflation. The only reason we haven’t experienced this is due to the special circumstances of business and finance in an economy on steroids. A lot of off-balance sheet items and quixotic accounting makes net income a very fuzzy number to follow. What is apparent is the food and gas inflation. That’s the inflation we have been feeling the most, a lot of it is due to this commodities super-cycle. When the price of corn, wheat and other staple commodities goes up, eventually the price of food using those components goes up as well to keep up its profit margins. If anything the end of this commodities boom will be a major relief to the everyday layman.