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Commodities

'Supercycle' began to wind down in 2008, expert says

BANGKOK -- As the prices of oil and other global commodities tumble, the consensus is that the most recent so-called supercycle is well and truly over. The question of when it ended, however, is still open for debate.

     Widely defined as an extended period of rising commodity prices, lasting perhaps a decade or more, supercycles appear when major-demand side shock occurs. This round, which broke out after the turn of the century, was apparently triggered by China's surging economic growth.

     Julian Jessop, head of commodities research at Capital Economics, claims it ended as early as 2008.

Cooling off

"Any supercycle that might have been triggered by the rise of China is now well and truly over," Jessop said in a research report released Friday, adding that "the only debate is when it ended."

     Because the crash in oil prices had such an extensive impact and left such a vivid impression, many observers say the end came sometime during the latter half of 2014. Others argue it was in 2011, when China's economy started to show signs of cooling off and prices of major industrial commodities reversed trend.

     David Jacks, economics professor at Simon Fraser University in Canada, studies the long-term history of commodity prices. He told the Nikkei Asian Review last December that the peak of the latest supercycle "would be around 2011 to 2014, depending on how you want to define it. If you just want to look at peak pricing, it will be 2011."

     Jessop, however, argues that "the wheels of the supercycle actually began to come off as early as 2008." The long-term trend of prices of industrial metals, he points out, "had already started to level out before the global financial crisis [of 2008]" and from 2011, these prices "have been on a clear downward trend." As for the oil rally that lasted until 2014, Jessop asserts that "prices had only been propped [up] by the uncertainty created by the Arab Spring, which began in earnest in early 2011." The unprecedented political and social situation in the Middle East sparked market concerns about supply-side security.

Shifting emphasis

As for future supercycles, Jessop believes they "will be shallower and shorter than in the past," partly due to more efficient transmission of supply-demand information. Since the main stimulus of supercycles is scarcity on the supply side coupled with the longer time it takes to meet that upswing on the demand side, "development of the Internet and the financialization of commodity markets [will reduce] the time lags involved." He also adds that as technology advances and service-related activities gain further importance, economies around the world will become "less commodity-intensive -- even in fast-growing developing countries."

     But this does not knock commodities off the list as an essential investment option. Jessop raises five specific arguments for commodities: portfolio diversification, economic importance, inflation hedging, safe havens and underlying value.

     Even though he predicts the arrival of less commodity-intensive economies, "commodities are still too important in economic terms to ignore." The expected tightening by the U.S. Federal Reserve may hit equities and bonds harder, given that they "have benefitted far more than commodities from the extended period of loose monetary policy in the U.S." And the recent collapse in commodities prices has made many of them "attractive in investment terms as well -- particularly compared to other assets, such as equities and bonds."

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