That the commodities supercycle is over is obvious: we can see that just by looking at the falling values of pretty much all of the commodities. However, there's a number of implications of this being bandied about which are wrong. It's not, for example, slowing growth in China which has killed it, nor will it be the Federal Reserve raising interest rates which gives it the final death blow. It's much more accurate to say that the producing companies, like say
The complication here is as Scott Sumner always says: don't try to reason from a price change. At least, not until you work out why the price has changed. Yes, we've got falling commodity prices, yes that supercycle appears to be over. Yet that doesn't then mean that the global economy itself is in trouble. Because prices are set not by demand, but by the balance of supply and demand. And as such prices can fall if supply increases just as much as they can if demand falls. Indeed, looking just at demand (or solely at supply, equally) doesn't tell us anything at all about which way prices are going to go. A fall in demand can be accompanied by a fall, rise or no change in price. It matters what is happening to supply at the same time.
Thus this sort of statement isn't quite true. It could be of course, but it doesn't have to be:
If slowing Chinese growth, now headed for its weakest pace in 25 years, put the first nail in the coffin of the super cycle, the Federal Reserve is about to hammer in the last.
The first U.S. interest rate increase since 2006 is expected next month by a majority of investors, helping push the dollar up by about 9 percent against a basket of 10 major currencies this year. That only adds to the woes of commodities, mostly priced in dollars, by cutting the spending power of global raw-materials buyers and making other assets that generate yields such as bonds and equities more attractive for investors.
That's not quite it. It's certainly true that China's astonishing growth drove prices up on the first leg of the cycle. suddenly demand was greater than supply: prices go up. And then all the producers hurried to produce more:
“It was all about China on the way up, and all about China on the way down,” says Jeremy Wrathall, equities analyst at
Investec . China’s growth surge led the biggest miners to ramp up supply. As mines can take up to 10 years to come on stream, supply that was needed a decade ago is only now reaching the market – just as demand cools off.
China's not growing as fast as it was once thought it would continue to do, certainly true. But as there with copper, the iron ore mines and so on to supply that thought to be ever expanding demand are coming online. It's not actually that China is buying any less iron ore in fact: the import statistics look lower because the price has fallen but volumes seem to be holding up.
What's really killing those high prices is that producers have overshot with their creation of new supply. This will lead to marginal players exiting the market (as is already happening with some domestic Chinese iron ore production and as might happen to one of the Australian operations) to bring it back into balance.
It could have been true that commodity prices are falling because the global economy is falling off a cliff. If that were so then public policy would be one way (more stimulus!). But if it's because of excess supply, which at least in many markets it is, then public policy is perhaps just to do nothing while we all enjoy a lower cost of inputs.
