The commodities cycle that sent prices rising almost fourfold over 10
years is reversing and will eventually drive raw materials into a
structural bear market, Goldman Sachs Group Inc. (GS) said.
Growth in shale oil output will keep U.S. energy prices low, reinforcing
economic growth and leading to more tapering of government stimulus,
the bank said in a report dated yesterday. That will cut raw-material
demand in emerging markets and lead to weakened currencies that will
encourage more production. The new cycle is the opposite of the “
super
cycle” that ran from 2002 through 2011, Goldman said.
“I can’t tell you about one commodity out there that has a bullish
supply-side story,” Jeffrey Currie, head of commodities research at
Goldman, said at the company’s investor conference in London today. “A
decade of higher commodity prices generated a supply response.”
Commodities posted the first annual drop in five years in 2013 as supply
exceeded demand for corn to sugar to nickel and investors lost faith in
precious metals as a store of value amid signs that economies are
improving. As higher prices spurred miners and farmers to boost
production at time when China’s economic growth slowed, Citigroup Inc.
said the “super cycle” of gains has ended.
“The rotation away from emerging markets and towards developed market
demand as well as the supply increase, particularly the U.S. shale
revolution, are creating a new commodity cycle,” Currie said in the
report. “On net, this new commodity cycle eventually suggests a
structural bear market in commodities, but we believe that is still in
the distant future.”
Weakening Currencies
The new cycle will lead emerging market nations to increase production
to raise cash to make up for weakening currencies, which will further
weaken prices and reinforce the U.S. recovery, Goldman said. A
“structural” bear market is only in the future because of
transportation, processing and distribution bottlenecks, Goldman said.
Surging U.S. oil output is largely trapped in the country and copper
smelters are failing to process rising supplies from mines, according to
the report.
Commodity cycles last about 25 to 30 years, with the first half spent on
building production capacity to meet demand and the next 10 to 15 years
spent on building capacity to consume, Currie said. Returns in the last
10 to 15 years will be positive for industries such as petrochemicals,
he said.
Precious Metals
The Standard & Poor’s Enhanced Commodity Index will fall 3 percent
in the next 12 months, with precious metals dropping 15 percent on top
of last year’s 30 percent decline and agriculture falling 11 percent
after sliding 18 percent in 2013, Goldman said. Industrial metals are
forecast to decrease 5 percent and livestock 3 percent, according to the
report. Energy will lose 1 percent, after gaining 5.6 percent in 2013,
the bank said.
Gold prices will fall to $1,050 an ounce in 12 months from $1,246 an
ounce now, while copper will be at $6,200 a metric ton from $7,283 a ton
now as the market moves into surplus, the bank said. A record soybean
crop in South America will send prices to $9.50 a bushel from $12.7325 a
bushel now.
While Brent will be at $100 a barrel in 12 months and West Texas
Intermediate oil at $90 a barrel, price risk is “skewed to the
downside,” Currie said in the report. Uncertainty about oil supplies due
to geopolitical risks in Libya and South Sudan means the bank is
neutral commodities over the next three months, with prices forecast to
return 3 percent in the period.
Source : bloomberg.com
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