Friday, July 13, 2007

Are We In a Multi-Year Super-Cycle With Metals?

This from the UK Telegraph might help explain why the stock market and the metal markets have been like the “energizer bunny” in spite of all the bad news in the US credit markets. This type of view begs the question, is the world economy de-coupling from the US economy. That is if the US slides into a recession will the rest of the world follow. It used to be that “if the US sneezed the rest of the world caught a cold”. That may only be partially true now.

To understand why Rio Tinto might want to fork out an eye-watering $38.1bn (£18.8bn) on Canada's aluminium giant Alcan, take a look at the price chart of any metal.

You will see a once-in-a-generation picture of explosive growth. From copper, up eight fold in five years, to lead, three times last year's price, the cost of the building blocks of industrialisation has soared.

It's a volatile ride. The price of nickel reached nearly $55,000 a tonne six weeks ago and has since plunged to less than $35,000. Copper, too, has bounced around this year.

Despite the rollercoaster, however, there is little doubt about the general direction of travel. Commodity prices - not just metals, but oil and agricultural crops too - are headed higher.
The only question is: how far and for how long?


The most enthusiastic commodity bulls say we are in the early years of a multi-year super-cycle, a prolonged and substantial increase in prices that is usually driven by the urbanisation and industrialisation of a major economy. Jim Rogers, a former partner of billionaire investor George Soros, believes prices could rise for up to another 15 years.

There have only been two significant super-cycles in the past 150 years. The first, in the late 19th and early 20th centuries, reflected the emergence of the US as a global economic superpower. The second was triggered by the post-war reconstruction of Europe and Japan between 1945 and 1970.

If this is the third super-cycle, there is no mystery about its cause: the integration into the global economy of China, India and many other smaller developing countries.

It is hard to overstate the impact of China's breakneck economic growth and the massive migration from its rural hinterland to its burgeoning coastal cities. The International Monetary Fund believes that China was responsible for half the increase in global demand for copper and aluminium between 2002 and 2005 and 87pc of the rising demand for nickel.

In previous super-cycles, supply has always eventually caught up with demand. But after years of under-investment in a 21-year bear market from about 1980, there is an enormous amount of catching up still to do.

With shortages of skilled workers and even basics such as big lorry tyres, the costs of cranking up supply are rising too.

Unless the global economy hits the skids in a spectacular way, it would be brave to bet against the super-cycle continuing for years to come. Rio's bid will not be the last

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