What's the next chapter in the long-term commodity bull market?
WASHINGTON, DC -- They were some crazy days while they lasted, but they may never return again in our lifetimes.
I'm referring to the period of acute supply shortages and soaring record prices that characterised commodity markets back when it seemed that China's appetite for raw materials was utterly insatiable. Prior to China's recent deceleration, while its GDP was still expanding at a double-digit clip, the global mining industry leapt into emergency expansion mode to meet skyrocketing demand.
Giants BHP Billiton (LSE: BLT) and Rio Tinto (LSE: RIO) helped to fuel a dramatic mining boom in Australia, dominated by ambitious iron ore projects in Western Australia and coal growth in places like Queensland and New South Wales. Brazil's Vale (NYSE: VALE.US) altered the course and structure of the dry-bulk shipping industry with its orders for a fleet of the largest bulk carriers in the world (known as Valemax carriers). Even Appalachian coal miners in the eastern US began to ship their coals into the bustling Pacific seaborne trade.
Everything in moderation
Over the course of this year, China's growth rate has slipped back into a range of roughly 7-8% growth, and with that sudden deceleration has come a painful and noteworthy shock for a mining industry that had dived aggressively into expansion mode. BHP Billiton released third-quarter production data this week, and in a related speech CEO Marius Kloppers offered his view that China's growth rate will now stabilise at roughly the present growth rate for the decade ahead. As a result, he says: "The record prices we experienced over the past decade, driven by the demand shock, will not be there to support returns over the next 10 years."
With specific regard to bellwether demand for steel, Kloppers believes that China's steel boom has peaked, and that "steel intensity per unit of GDP will continue to moderate and growth rates for iron ore and coal are likely to decrease". Naturally, this moderated outlook requires that the major miners scale back some of their previously envisioned growth initiatives, and we've seen that process in play as BHP recently put the brakes on a $6 billion pair of met-coal projects in Queensland.
Both BHP and Rio Tinto are still committing some rather massive capital expenditures to current growth projects, but both companies have indicated a de facto moratorium on any further project approvals for the time being. Rio Tinto expects its $16 billion budget for capital expenditures in 2012 -- which includes heavy investment in expanding iron ore production from its Pilbara mines in Western Australia -- will itself represent a multi-year peak.
A soft landing for the global commodity supercycle
I must say I am thoroughly relieved by Kloppers' view that prices for industrial commodities broadly -- and steel demand growth rates in particular -- have peaked. The frequent price spikes and dizzying volatility that characterised the preceding demand-shock period did not present a friendly investment climate, and those high prices for essential raw materials were certainly of no help to the myriad nations that are trudging through extended periods of profound economic stagnation.
Furthermore, I wish for Fools to remain absolutely clear in their understanding that these newly moderated outlooks for global commodity demand still leave loads of opportunity on the table for investors. A stabilised growth rate for China in the upper-single-digits would equate to a soft landing for this very key player in the global economy, resulting in what we might Foolishly refer to as a soft landing as well for the long-term bull market in commodities that Peabody Energy (NYSE: BTU.US) and others have termed a "supercycle".
In the near-term, I expect a combination of widespread production curtailments and China's recently announced $150 billion spending package to begin to turn the tide and offer something of a relief rally. Longer term, steel demand will continue to rise, just not likely at the rates we've seen in years past. Although met coal is currently suffering from a readily apparent surplus, I continue to view resurgent strength on the cards for the steel-making ingredient, and stand steadfast with my long-term investment holdings in Peabody Energy and Teck Resources (NYSE: TCK.US).
Kloppers estimates that 650 million tonnes of additional iron ore demand will emerge by the year 2020, compared to incremental demand of 800 million tons added between 2000 and 2010. He believes the commodity markets will feature "demand growth at more predictable and sustainable levels", which provides a far more reliable vantage point for mining companies as they render decisions on capital-intensive and long-lead-time development projects.
As a long-term investor, I favour a more stable market environment that is less inclined toward malinvestment than the preceding demand-shock period, which was itself characterised by unpredictable boom-and-bust micro-cycles. I am thankful that the peak growth rates have passed, and look forward to a somewhat less volatile chapter in the long-term commodity bull market.
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> Christopher owns shares in Peabody Energy and Teck Resources.