The mining supercycle is over
The commodities supercycle - the idea that the rampant growth of emerging markets and Asia in particular would drive raw materials prices ever higher - has been a major investment theme for the past decade.
But all good things must come to an end.
We've argued for some time that China was heading for a hard landing following its money-printing extravaganza.
It's now becoming clear to others that China is in trouble. And even if the country does avoid a crash, it has changed its focus. Whatever happens, its intense demand for commodities is set to drop off.
And that's got to be bad news for mining stocks...
China's economy is slowing
What's been driving the commodities supercycle? In a word, China.
Sean Corrigan of Diapason Commodities Management has several very informative charts in his latest missive. One of the most interesting shows the change in China's share of global metals consumption for various metals since June 2000.
In 2000, China accounted for less than 18% of global tin consumption. Now it accounts for nearly 50%. Its share of nickel consumption has risen from less than 6% to around 43% over the same time period. Copper? From below 10% to above 45%.
That's incredible. And it also gives rise to a pretty simple equation. If Chinese demand for raw materials drops off, and no one is there to pick up the slack, then most industrial commodity prices are going to take a severe hammering.
It's already clear that, whether 'hard' or 'soft', China is having some sort of landing. Whatever they may say now, up until very recently, most China bulls had 8% GDP growth in mind as the 'magic number'. The Chinese government itself has already scuppered that particular vision by setting a target for 7.5% growth.
Now we hear that China's trade surplus grew in April. Exports grew by 4.9% year-on-year, down from 8.9% in March. Imports grew by just 0.3%, down from 5.3%.
Last week, reports the Financial Times, export orders at the world's biggest trade fair, the Canton Fair, shrank by 2.2% on last year. That's "the first decline since the global financial crisis".
Demand is slowing across the board, and China's consumers aren't picking up the slack fast enough.
Whatever China does, commodity prices look set to fall
But what's most important to remember is that even if China does better than we expect, the focus of its development is now changing. If China does somehow manage to rebalance smoothly towards favouring the consumer over rampant investment growth, it could be a fantastic opportunity for investors.
However, as Corrigan points out, "what we would not see would be a prolongation of the sort of resource gluttony we have experienced throughout the past cycle".
In other words, unless there's a rampant recovery in Europe and the US, then the supercycle in industrial metals is most likely behind us.
The market has already started pricing this in. As the FT points out this morning, the FTSE All-World Mining Index is now more than 30% off its April 2011 peak. But with investors still waking up to the potential woes of the sector, that could well fall further.
Meanwhile, the FTSE 100 remains perhaps surprisingly dependent on mining stocks - the sector accounts for roughly an eighth of the index's market value. This is one reason why we're not keen on holding a FTSE index tracker - it makes more sense to favour specific sectors (and in some cases, specific high-yielding blue chips) rather than getting exposure to the index as a whole.
The fact is that a lot of investment success is about being in the right place at the right time. Commodities going up? Just buy a spread of miners via an investment trust or sector tracker, you'll do OK. Credit crunch biting? Avoid banks and financials.
Keep things simple. Don't bother trying to pick winners in a losing sector, unless you are supremely confident that you know what you're doing. For now at least, that applies to the miners.
Not all commodities are created equal
Not all commodities are heading for a major fall. Energy and agricultural commodities have slightly different drivers. That's not to say they won't be affected by Chinese demand, but they're worth considering on their own - we'll look at them separately in future emails.
Also, Corrigan argues that when desperate central bankers inevitably resort to more money printing, then this will increase the desire to hold 'real' assets of all stripes. That would include base metals.
I don't think he's wrong. Another bout of money printing would probably boost miners (they're currently a 'risk on' asset) and also raw material prices in general. However, I don't honestly see the point - as a small investor - of holding copper or tin as a speculative hedge against rampant money-printing, when it's a lot easier to just hold gold instead. Of all the commodities, it's the one that qualifies best as 'money', and as a result, it's the one I'd stick with as a 'debasement' hedge.
This article is authored by MoneyWeek, the UKs best selling financial magazine. MoneyWeek offers intelligent, easy-to-read analysis of the financial news, with practical investment advice.
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