The Commodities Supercycle Is Over — Here's What's Next

REUTERS/Peter Andrews

Workers pour molten silver into moulds at the KGHM copper and precious metals smelter processing plant in Glogow May 10, 2013.

$('.icon-tooltip').tooltip();Sluggish global growth and a recent economic slowdown in resource-hungry China have hammered commodities markets this year, sending the price of everything from iron ore to copper tumbling. With those sharp reversals—as well as the Fed’s comments about tapering the size of the United States’ monetary stimulus—fresh in their minds, the 300 clients who convened last week at Credit Suisse’s New York headquarters for the bank’s third annual Commodities Day had plenty to talk about.

With few exceptions, the prices of commodities such as oil products, precious metals and industrial metals have been steadily rising over the past decade in what analysts have termed a “commodities supercycle.” That era is over, Credit Suisse experts say, and they expect prices to remain under pressure at least through the end of the year. What’s more, the prices of individual commodities will no longer rise and fall together as they have for the last five years, Credit Suisse’s commodities team explained in a June 25 research note (“Commodities Forecast Update: The Return of Fundamentals”). As a result, investors and traders are going to have to focus on the specific supply and demand dynamics for individual commodities.

Copper and iron ore prices, for example, are expected to decline because supplies of both metals are becoming more plentiful at the same time that demand is declining. Copper is used in wiring and electrical equipment, and is thus sensitive to both building activity and demand for electronics. And iron ore is an indicator of industrial activity of all kinds. Prices of both should soften as China’s building and manufacturing boom cools off. Demand for palladium, on the other hand, should stay strong thanks to the steadily growing Chinese car market, at the same time that labor unrest in South Africa looks likely to slow growth in supply. That points to higher prices.

The Attendees

Attendees at Commodities Day represented a wide variety of investors. Close to one-third were from hedge funds, while roughly one-fourth were institutional investors.

The Year Ahead

Out of four commodity sectors – energy, precious metals, industrial metals and agriculture – energy and agriculture nearly tied (37 percent and 36 percent, respectively) as investors’ pick for the most promising bet over the next year.

Most investors – 41 percent – think commodity prices will remain at their current levels a year from now. Perhaps more telling is the fact that nearly one in four respondents (23 percent) said they had absolutely no idea where commodity prices were going.

One thing is clear, though. Investors don’t expect the market to stabilize. More than half (53 percent) of those surveyed believed volatility would be higher over the coming year than it was in the previous year. About a third of investors thought volatility would stay the same, but only 15 percent thought it would decline.

Oil Markets

Brent crude oil prices have fallen from a high of $118.90 in February to just over $100 in early July. Most investors think that decline will continue.

Credit Suisse recently cut its Brent crude oil forecast for the next six months to $108 from $112, due to concerns about how much consumption can rise given a still-fragile U.S. recovery as well as the risk of a slowdown in emerging markets. But in the medium term, Credit Suisse’s oil analysts are optimistic about prices, noting that global supply is likely to stay tight this year as international sanctions are successfully keeping Iranian crude off European and other key markets. Ongoing conflicts in large OPEC countries such as Iraq, Nigeria and Libya, have also tightened production. Credit Suisse expects Saudi Arabia, the world’s largest oil producer, would have to boost production by 1.2 million barrels per day in the third quarter to keep prices from falling.

In the long term, analysts say, developed markets will use less oil, not more, and emerging markets could see a similar decline within a decade. At the same time, a shale drilling boom in the U.S. will bring more supply of shale oil online. “The clear implication is that in a slower-growth world, still fraught with uncertainty, plentiful supplies eventually bring down oil prices,” analysts said in the “Return to Fundamentals” research note. 

Metals

Of the four base metals used for industrial and commercial purposes (copper, aluminum, zinc and lead), 35 percent of investors predicted that copper—which has shed 34 percent of its value since a 2011 peak—would be the best-performing base metal over the next year. But Credit Suisse’s commodities team said copper prices might fall further still. “Copper stands out as being the most overvalued of the LME metals, in our view,” analysts said the “Return to Fundamentals” research note. “Inevitably, we think prices must come under further downward pressure soon.”

Nearly half of attendees think the recent rout in gold prices isn’t quite over, and think the metal will be trading between $1,000 and $1,200 an ounce in a year. Gold has not dipped below $1,200 an ounce since 2010, but is currently trading around $1,246, down from a high of nearly $1,792 in October.

But if investors were pessimistic about gold, they were hot for palladium. More than half of the survey respondents—53 percent—thought palladium would outperform gold, silver and platinum in the coming year. Credit Suisse analysts are maintaining a long-term bullish outlook on palladium and believe that supply will fall short of demand through 2016, keeping prices high. But they also noted that ETF holdings, investors and funds account for 50 percent of annual palladium demand, making the precious metal vulnerable to a selloff if investor fears about a global macroeconomic slowdown return.

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