Every day now media publish
woeful stories of markets battling over-capacity, of investors fleeing a bear
market, of governments desperate for revenue and of miners fighting for
survival. Quite different from the expected ongoing bright future of a
commodities Super Cycle that few had predicted. In this concluding article Mike Schussler, Director of South
Africa’s leading private economic research house Economists.co.za, describes
the massive realignment of the world economy that will result from long-term depressed commodity prices.
IT LOOKS LIKELY THAT the current
fall in commodity prices will be one of the biggest on record and, with central
banks printing money like never before, the real drop in commodity prices may
be closer to 66% as similarly experienced between 1917 and 1931.
 |
| Mike Schussler |
In every commodity Super Cycle, the
rise in commodity prices is followed by over-supply that lasts for years as
companies battle for survival by flooding the market and bringing costs down.
Remember Peak Oil? No? That is
because in current prices, oil is cheaper than in 1981. Although storage costs
are on the way up as there is too much oil, oil producers are still pumping
like crazy to maintain “market share.” Their biggest enemy is other oil
producers, not their customers. Witness the warm feeling Iran has towards the West
and Saudi Arabia’s proxy wars against Iran.
Remember shortages of steel, iron
ore and a host of other materials such as lumber and rubber? Now we have too
much steel and, on current iron ore supply, could rebuild the world’s entire
infrastructure in the next decade. Steel and Iron ore prices have fallen by
two-thirds but even more supply is on the way.
Consumers have fat years ahead of them
The world has never before
expended so little of consumer income for wheat, corn, oats and meat.
We have over 750 years of wheat
price data and it has never been cheaper in real terms. Wheat was 6% cheaper at
the end of 2015 than at the end of 1973 in nominal dollar terms!
The world has simply too much
maize and wheat. Beef and chicken prices are dropping in USD terms too. By the
end of the low commodity cycle, consumers in advanced countries may spend less
than 5% on food.
If history repeats itself and the
world is entering a period of 15 more years of low prices, the effects on
emerging market economies will be huge.
I predict that most of the commodity
prices falls are over but have another 30% to fall in real terms from end 2015 -
which will be less than nominal terms but about 20% or so before a bottom is
reached.
Greater economic impacts in Commodity countries
The hyper- or high-inflation that Germany
suffered in the 1920s and 1930s and deflation elsewhere is also repeating. Brazil and Russia have double digit inflation
and Venezuela may have inflation higher than 100%! Switzerland is in a
deflationary situation while the Eurozone, USA and Japan have very low inflation.
 |
Image courtesy of Stuart Miles
at
FreeDigitalPhotos.net |
The realignment of currencies is
probably the biggest difference between the Great Depression and current weak
growth.
Currencies are acting as buffers for commodity exports and as further
deflationary anchors for the developed world and China.
Debt levels also play a role in
growth and, for some countries it will be the biggest issue but, for many
emerging market countries, commodity prices will play the biggest role.
Rising unemployment in Brazil,
Russia, Saudi Arabia and Africa will have political impacts too. Add the lower
growth outlook to the Middle East and Africa and those two regions will again
start falling back along with much of Latin America. That would allow the
difference in income between the rich and poor countries to grow again.
Asia will feel more positive as
generally it is a commodity-consuming continent. But of course steel producers
and much of heavy industry, such as ship building, will feel the same commodity
price slump as will rice and other farm commodities.
Consumers in Asia will be much
better off generally but the growth here too will be substantially slower and
service industries will be the major growth driver – not construction or
manufacturing and primary industry.
Interest rates will stay low in
the developed parts of Asia such as Japan and South Korea and probably China but
countries which are commodity producers, certainly Australia, New Zealand and Indonesia,
will feel that their currencies are under pressure.
India will be different. She is
getting ready to be the next new economic Super Power but any significant impact
on commodity prices is still at least a decade away.
Not only will commodity countries
suffer lower prices but their interest rates and inflation will rise. The impact
will also be felt in that their current account and government fiscal balances
will remain under pressure.
Just like any perfect storm these
countries will also see ratings downgraded just as they need more money to
cover shortfalls. Generally these are the parts of the world where population growth
is still higher than average.
As this will not be a once-off
situation and will continue well into the first part of the next commodity
upswing; expect Europe and North America to continue to be approached by high
numbers of refugees and economic migrants.
This will continue well into the
2030s and will have big impacts on housing, religion and social cohesion in the
receiving countries. The brain drain of the developing world will unfortunately
continue but over time tourism and remittances will grow strongly as well as
some exports of local favourites.
The world changes in this part of the cycle
The “big man” syndrome along with “Dutch
disease” will be off the radar for the next two decades and poor countries will
get out of mining and services to mining. Privatisation will make a very big
comeback as budget holes enforce sales.
The rich world will evolve in
economic terms with new industries such as renewable energy and energy storage
and new services. That will lift other newer commodities, perhaps lithium or
other elements that will be used in energy or new industries.
The commodity world will have to
find new ways to attract wealth and jobs. It will have to change to more value-added
products and services which require better education and work ethic and allowing
consumer businesses to grow.
Importantly, another 15 years of
low commodity prices will result in totally different mining and agricultural
companies, even more mechanised and automated and employing less people.
I also expect new products to rise
to commercial success such as electric cars; new power storage methods, and new
and better logistics and transport to emerge bringing new industries. I expect
that Asia, North America and Europe to be central to these new industries which
will then bring the new commodities to the fore.
New commodities could include
Lithium Acid, Natural Gas, and others used in renewable energy, storage,
composite materials and additive manufacture. I expect more chemical type commodities
to come to the fore.
Some commodities will remain the
same, such as wheat, meat, corn, gold and silver but the era of coal and oil, perhaps
even iron ore and steel, is gradually coming to an end. Nothing is certain but
the changes will be bigger over the next decade and a half than any other time
in the last sixty-seventy years.
Commodities in decline will require
larger operations to utilise economies of scale and to take advantage of innovations..
It will become more important for commodity countries to attract those majors
and that will be those companies’ main strength for the next two decades. The
bigger companies will also take over state-owned companies and bring modern
management methods to play to increase productivity while containing costs.
Faster and smaller companies will develop
the new commodity sector. As they will focus on growth, cost containment will matter
far, far less to them.
