Whatever happened to the commodity super-cycle?
If you Google the words 'commodity super-cycle', you will get many bullish hits from around 2007 and again from 2010. However, the years in-between are a little quieter, with some commentators questioning the validity of the theory due to the effects of the credit crunch.
By this crude measure, it seems that interest in the concept of a super-cycle may once again be gathering pace.
Cycles
The concept of a commodity super-cycle is based on the expected structural growth of emerging economies like China and India. The theory holds that demand for raw materials and commodities will increase as infrastructure is developed and millions of new consumers require fridges, cars, radios, TVs etc.
To my mind, the theory never pretended that the price of commodities would be immune from the business cycle or the credit cycle. The recent credit squeeze, although unusually severe, was a normal part of these cycles and the prices of commodities were always going to wiggle about like a fiddler's elbow.
Where commodity prices travelled, the share prices of well-known large mining companies followed: first down, then up, then down again -- you get the picture.
All of this has taken the wind out of the sails of some of the super-cycle bulls. But it shouldn't, as theoretically any big change in commodity pricing should still happen regardless of the other normal cycles. However, not everybody believes in the possibility of a commodity super-cycle; some believe that the price of commodities will be kept in check by normal demand and supply mechanisms.
Confusion
It has certainly been hard for investors to judge which way commodity prices would travel over the last three years. It seems to me that the share prices of the big mining companies have generally exaggerated the movements of the stock market indices. If this is so, and if you believe that share prices may be entering a bull-phase anytime soon, you might be tempted to invest in (or hold onto) the mining giants.
On the other hand, if economies are about to tank again, implying another commodity price crash, you might want to sell out, in order that you don't follow the shares down into another stomach-churning dip.
Outlook
One way of attempting to get a steer on the way things might be going, is to read what the miners themselves have to say in their outlook statements.
Firstly, mega-miner BHP Billiton (LSE: BLT), that released this statement on 20 July:
BHP Billiton continues to be cautious on the short-term outlook for the global economy. Uncertainty surrounds the near term prospects for growth in the developed world as governments adjust fiscal policies following a period of significant stimulus and subsequent increase in sovereign debt levels. Within China, measures introduced to reduce growth to more sustainable levels means volatility in commodity end-demand is likely to persist. BHP Billiton sees these measures as a normal continuation of China's economic management policies.
Then, in its interim statement released on Friday 30 July, Anglo American's (LSE: AAL) outlook statement read like this:
The near term outlook for the world economy has become more uncertain in recent months. In 2009, there was a rapid bounce in global industrial activity in response to the unprecedented policy stimulus and a turn in the inventory cycle. More recently, leading indicators have indicated less favourable conditions. Inevitably, there will be some consolidation after the initial bounce-back, as the positive effects from the stimulus and inventory cycle fade.
Anglo American remains confident about the outlook for the industry in the medium to long term, with the process of industrialisation and urbanisation in China, India, Brazil and other emerging countries continuing to drive demand for its key commodities.
Meanwhile, Rio Tinto's (LSE: RIO) chief executive said this on 14 July:
2010 continues to shape up well for Rio Tinto and we are driving our operations at close to capacity. Markets for most of our products are strong and the overall long term demand outlook is positive. But in recent weeks, fears about a possible double-dip recession in OECD countries and a slight slowdown in Chinese growth have led to some weakening in sentiment. We believe this pattern of volatility in the global economy is set to continue.
Consensus
From reading the miners' comments, it seems that they generally expect further volatility in commodity prices in the short term, with an improving positive outlook in the medium to long term.
As to whether we will see some massive super-cycle in commodity prices, I'll believe it when I see it. That won't stop me from buying more big mining company shares on any short-term price weakness, just in case!
More from Kevin Godbold:
Kevin owns shares in BHP Billiton.
