Commodity supercycle not over yet – JPM Natural Resources team
A little correction in gold, a softening of other commodity prices and economic growth dips, and many strategists are already factoring in the end of the “commodity supercycle”.
But Neil Gregson, fund manager of the JPM Natural Resources Fund, believes it has at least another 15 years to run, especially in the emerging world.
“Commodity investing has rapidly gone out of fashion.,” he notes. “A sector once celebrated by investors as the best way to profit from long-term structural growth in the emerging markets, now elicits at best a sceptical indifference. Investors have become fatigued by two years of lacklustre returns in which resource stocks have considerably underperformed broader equity indices…they have begun to question whether we are indeed in the last throes of the commodity super-cycle.
In a paper outlining his views (available at http://www.jpmam.com/insight/EN/showpage.aspx?pageid=119&articleId=0c61afe3-3a97-47e1-b06e-29fb78668c36) Gregson says a third economic supercycle is underway.
Despite the destabilising effects of the bursting of the dot-com bubble, the 9/11 attacks, the collapse of Lehman and the European sovereign debt crisis, the period from 2000 to the present has been the most transformational supercycle to date. Emerging market countries have begun pursuing prudent macroeconomic policies and balanced growth, unlocking their growth potential in a process that “will last until 2030 and will be commodity intensive throughout”.
So far, the supercycle has been characterised by a surge in demand for commodities most closely linked with fixed asset investment such as coking coal, iron ore or cement. But as consumption begins to account for a larger proportion of Chinese GDP growth, other commodities will come to the fore such as copper (consumer appliances), titanium dioxide (ceramics & paint) and petroleum (auto demand).
“The full force of the supercycle has yet to be felt by producers of these commodities,” adds Gregson.
While there has been a focus on prospects in China, India has been largely ignored, since local authorities have lacked a systematic approach to urbanisation and industrialisation.
“While India’s recalcitrance has been a source of frustration for investors thus far, it does mean that many years of commodity intensive growth remain in the pipeline, with the potential to more than offset declines in Chinese fixed asset investment,” said Gregson.
The opportunity extends beyond India to rapidly growing economies such as Indonesia, the Philippines, Bangladesh and Vietnam, which are themselves under-urbanised.
Analysis is dominated by assessments of demand, but Gregson says faltering supply is as important a driver of the supercycle as explosive demand.
“For most of the twentieth century commodity prices were in decline in real terms. During this period, human ingenuity and inventiveness, expressed through technological innovation and improved productivity, effectively met the challenge of heightened demand.”
“However, the low hanging fruit has been plucked and supply for many commodities has become increasingly inelastic. Accessing resources is more and more problematic and marginal costs for many commodities are upward trending. Those producers operating in finely balanced commodity markets that have low-cost, long life reserves will continue to enjoy strong profitability.”