January 28, 2016

Free-falling commodities and the super-cycle theory

Economy

One of the most important phenomena taking place last year has been the collapse of commodities. Crude oil isn’t the only one experiencing a free-fall: at the beginning of 2016, industrial raw materials saw the lowest valuations since 1991, which is the year in which valuations started being recorded. A slow agony according to Bloomberg’s analysts, who have been following the issue for years.

FT analysts are saying it’s the end of a super-cycle, embracing a fascinating theory conceived some time ago by Nikolai Kondratiev and Joseph Schumpeter, according to which economic changes follow recurring cycles. The collapse of the price of industrial raw materials seems to be perfectly corroborating their speculations, therefore we could have foreseen it. Maybe not those companies directly involved in commodities though. Only four years ago, for instance, an enterprise giant such as Glencore was on top of its game, controlling the supply chain of raw materials almost entirely, from extraction to distribution, while mounting an aggressive buying campaign at the top end of the market. Today the company has lost over the 85% of its value, with leftover stock scattered all over the globe and burdened by a debt that will unlikely be collected on unless the price of raw materials increases. Today companies such as Glencore are left with two choices: either produce more, causing a further price drop, or produce less, causing a drastic reduction in profits.

The times when the price of raw materials was chasing demand seem to be over. The virtuous circle that started in the early 2000s, when China quit being a under-developed country and began its race to become one of the world’s most powerful and influential economic giants, has inexorably lost its drive. Raw materials have fed this growth providing the Celestial Empire with oil, metals and cereals, while a weak dollar contributed for many years to the spreading of speculative investments. Then the Chinese economy started slowing down and the commodity bubble burst. The phenomenon has been analysed in depth by two American economists, who, after applying new techniques, have identified four super-cycles of raw materials: the first one reached its summit in 1917 and its nadir in 1932, the second one achieved its record high 1951 and its all-time low during the oil crisis, while the third one witnessed its best in 1973 and its worst in 2012. Are we at the end of a super-cycle then?

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